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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000 Commission file number 0-15786
----------------- -------
COMMUNITY BANKS, INC.
- --------------------------------------------------------------------------------
(Exact names of registrant as specified in its charter)
Pennsylvania 23-2251762
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
150 Market Street, Millersburg, PA 17061
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (717) 692-4781
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Securities registered pursuant to Section 12 (b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- --------------------
Common Stock, par value $5 per share American Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act: NONE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---------- ---------
As of March 1, 2001, the aggregated market value (based on recent selling
prices) of the voting stock of the registrant held by its nonaffiliates
(5,740,658 shares) was $117,970,522
Indicate the number of shares outstanding of each registrant's classes of common
stock, as of the latest practical date.
7,046,687 shares of common stock outstanding on March 1, 2001
DOCUMENTS INCORPORATED BY REFERENCE
Exhibit 13 contains portions of the Annual Report to Stockholders incorporated
by reference into Parts I, II, and III.
Exhibit index is located on page 27, This document contains 32 pages.
Indicate by check mark if disclosure of delinquent filers pursuant to item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
1
PART I
Item 1. Business:
- -----------------
Community Banks, Inc. (Corporation) is a financial holding company whose
banking subsidiaries are Community Banks, N.A. (CBNA) and Peoples State Bank
(PSB) and whose non-banking subsidiaries are Community Banks Investments, Inc.
(CBII) and Community Banks Life Insurance Company, Inc. (CBLIC).
The Corporation conducts a full service commercial banking business and
provides trust services in Adams County, Cumberland County, Dauphin County,
southern Luzerne County, Northumberland County, western Schuylkill County,
Snyder County, and York County. The Corporation currently has 36 offices. There
are 70 offices of commercial banks and savings and loan associations within its
market area with which the Corporation competes. Deposits of the Corporation
represent approximately 17% of the total deposits in the market area. The
Corporation has 3 offices in Adams County, 1 office in Cumberland County, 9
offices in Dauphin County, 3 offices in Luzerne County, 2 offices in
Northumberland County, 10 offices in Schuylkill County, 1 office in Snyder
County, and 7 offices in York County.
Like other depository institutions, the Corporation has been subjected to
competition from brokerage firms, money market funds, consumer finance and
credit card companies and other companies providing financial services and
credit to consumers.
During 1986 the Corporation formed CBLIC to provide credit life insurance
to its consumer credit borrowers. Total premiums earned were $835,000 for the
year ended December 31, 2000. During 1985 the Corporation formed CBII to make
investments primarily in equity securities of other banks. Total assets of CBII
at December 31, 2000 were $3,738,000.
The Corporation has approximately 401 full and part-time employees and
considers its employee relations to be satisfactory.
Community Banks, Inc. is registered as a bank holding company with the
Board of Governors of the Federal Reserve System in accordance with the
requirements of the Bank Holding Company Act of 1956. It is subject to
regulation by the Federal Reserve Board and the Comptroller of the Currency.
In 1989, the Federal Board issued final risk-based capital guidelines for
bank holding companies which were phased in through December 31, 1992. The
intent of regulatory capital guidelines is to measure capital adequacy based
upon the credit risk of various assets and off-balance sheet items. Risk
categories, weighted at 0%, 20%, 50% and 100%, are specifically identified. The
sum of the results of each such category is then related to the adjusted capital
account of the Corporation. The minimum required capital ratio at December 31,
2000, was 8 percent. The Corporation's December 31, 2000 ratio approximated 11.3
%. Subsequently, in August 1990 the board announced approval of capital to total
assets (leverage) guidelines. This minimum leverage ratio was set at 4% and
would apply only to those banking organizations receiving a regulatory composite
1 rating. Most banking organizations
2
will be required to maintain a leverage ratio ranging from 1 to 2 percentage
points above minimum standard. The Corporation's leverage ratio at December 31,
2000, approximated 8%. Risk-based capital requirements replace previous capital
guidelines which established minimum primary and total capital requirements.
CBNA and PSB are also subject to various regulatory capital requirements
administered by federal and state banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory and possibly additional
discretionary actions by regulators that, if undertaken, could have a direct
material effect on the Corporation's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
each subsidiary bank must meet specific capital guidelines that involve
quantitative measures of assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The capital amounts
and classification are also subject to qualitative judgements by the regulators
about components risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
requires CBNA and PSB to maintain minimum amounts and ratios (set forth in the
table below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined) and of Tier 1 capital (as defined) to average
assets (as defined). Management believes, as of December 31, 2000, that CBNA and
PSB meet all capital adequacy requirements to which they are subject.
The following table summarizes the Corporation's capital adequacy position:
At December 31, 2000
- ------------------------------------------------------------------------------------------------------------------------------------
Tier 1 Capital Total Risk-Based Capital Capital Leverage
Ratio (A) Ratio (B) Ratio (C)
- ------------------------------------------------------------------------------------------------------------------------------------
Required Minimum 4.0% 8.0% 4.0%
Community Banks, N.A. 10.6 11.6 7.9
Peoples State Bank 9.9 11.0 7.8
Community Banks, Inc. 10.3 11.3 7.8
(A) Tier 1 capital divided by year-end risk-adjusted assets, as defined by the
risk-based capital guidelines.
(B) Total capital divided by year-end risk-adjusted assets.
(C) Tier 1 capital divided by average total assets less disallowed intangible
assets.
On November 12, 1999, President Clinton signed into law the
Gramm-Leach-Bliley Act (better known as the Financial Services Modernization Act
of 1999) which will, when effective March 11, 2000, permit bank holding
companies to become financial holding companies and thereby affiliate with
securities firms and insurance companies and engage in other activities that are
financial in nature. A bank holding company may become a financial holding
company if each of its subsidiary banks is well capitalized, is well managed and
has at least a
3
satisfactory rating under the Community Reinvestment Act, by filing a
declaration that the bank holding company wishes to become a financial holding
company. Also effective March 11, 2000, no regulatory approval will be required
for a financial holding company to acquire a company, other than a bank or
savings association, engaged in activities that are financial in nature or
incidental to activities that are financial in nature, as determined by the
Federal Reserve Board. The Financial Services Modernization Act defines
"financial in nature" to include; securities underwriting, dealing and market
making; sponsoring mutual funds and investment companies; insurance underwriting
and agency; merchant banking activities; and activities that the Federal Reserve
Board has determined to be closely related to banking. A national bank also may
engage, subject to limitations on investment, in activities that are financial
in nature, other than insurance underwriting, insurance company portfolio
investment, real estate development and real estate investment, through a
financial subsidiary of the bank, if the bank is well capitalized, well managed
and has at least a satisfactory Community Reinvestment Act rating. The specific
effects of the enactment of the Financial Services Modernization Act on the
banking industry in general and on the Corporation in particular has yet to be
determined due to the fact that the Financial Services Modernization Act was
only recently adopted.
Pursuant to the provisions of the Gramm-Leach-Bliley Act, Community Banks,
Inc. became a financial holding company, June 26, 2000.
4
Statistical Data:
- ----------------
Pages 5, 21, and 22 of the Community Banks, Inc. Annual report to
stockholders dated December 31, 2000 contain the following information
concerning:
Financial Highlights, Average Balances, Effective Interest Differential,
and Interest Yields for the three years ended December 31, 2000.
Rate/Volume Analysis for the two years ended December 31, 2000.
Appendix A attached to Part I contains information concerning:
Return on Equity and Assets for the five years ended December 31, 2000.
Amortized cost and Estimated Market Values of Investment Securities as of
December 31, 2000, 1999, and 1998.
Maturity Distribution of Securities as of December 31, 2000 (Market Value).
Loan Account Composition as of December 31, 2000, 1999, 1998, 1997, and
1996.
Maturities and Sensitivity to Changes in Interest Rates for Commercial,
Financial, and Agricultural Loans as of December 31, 2000.
Non-performing Loans as of December 31, 2000, 1999, 1998, 1997, and 1996.
Loan Loss Experience for the five years ended December 31, 2000.
Loans Charged Off and Recovered for the five years ended December 31, 2000.
Allowance for Loan Losses as of December 31, 2000, 1999, 1998, 1997, and
1996.
Maturity Distribution of Time Deposits over $100,000 as of December 31,
2000.
Maturity Distribution of all Time Deposits as of December 31, 2000.
Interest Rate Sensitivity as of December 31, 2000.
5
Item 2. Properties:
The Corporation owns no real property except through its subsidiary banks.
CBNA owns the following buildings: 150 Market Street, Millersburg, Dauphin
County, Pennsylvania (the corporate headquarters); 13-23 South Market Street,
Elizabethville, Dauphin County, Pennsylvania; 3679 Peters Mountain Road,
Halifax, Dauphin County, Pennsylvania; 906 North River Road, Halifax, Dauphin
County, Pennsylvania; 800 Peters Mountain Road, Dauphin County, Pennsylvania;
Main and Market Streets, Lykens, Dauphin County, Pennsylvania; Route 209, Porter
Township, Schuylkill County, Pennsylvania; 29 East Main Street, Tremont,
Schuylkill County, Pennsylvania; Second and Carroll Streets, St. Clair,
Schuylkill County, Pennsylvania; Port Carbon Highway, St. Clair, Schuylkill
County, Pennsylvania; 300 East Independence Street, Shamokin, Northumberland
County, Pennsylvania; Route 61, R.D. 1, Orwigsburg, Schuylkill County,
Pennsylvania; One South Arch Street, Milton, Northumberland County,
Pennsylvania; 30 S. Church Street, Hazleton, Luzerne County, Pennsylvania; 702
West Main Street, Valley View, Schuylkill County, Pennsylvania; Route 25, East
Main Street, Valley View, Schuylkill County, Pennsylvania; 735 Center Street,
Ashland, Schuylkill County, Pennsylvania; 300 Hobart Street, Gordon, Schuylkill
County, Pennsylvania; 9-11 N. Centre Street, Pottsville, Schuylkill County,
Pennsylvania; One Westside Drive, Shamokin Dam, Snyder County, Pennsylvania; and
2796 Old Post Road, Linglestown, Dauphin County, Pennsylvania. In addition
thereto, CBNA leases an office at Main Street, Pillow, Dauphin County,
Pennsylvania, pursuant to a lease which, with renewal options, will extend to
the year 2008. Also, the Bank leases offices at 390 E. Penn Drive, Cumberland
County, Pennsylvania; Route 93, Conyngham, Luzerne County, Pennsylvania; 77
Airport Road, Hazleton, Luzerne County, Pennsylvania; 6700 Derry Street,
Rutherford, Dauphin County, Pennsylvania; and 339 Main Street, LaVelle,
Schuylkill County, Pennsylvania.
All the buildings used by CBNA are free-standing and are used exclusively
for banking purposes with the exception of offices at the Pillow, St. Clair,
Milton, Pottsville, Hazleton, LaVelle, and Valley View locations.
CBNA also owns or leases the following properties for the purpose of future
expansion: 5060 Johnstown Road, Lower Paxton Township, Dauphin County,
Pennsylvania and 201 St. Johns Church Road, Camp Hill, Hampden Township,
Cumberland County, Pennsylvania.
PSB owns the following buildings: 100 E. King Street, East Berlin, Adams
County, Pennsylvania; 3421 Carlisle Road, Dover, York County, Pennsylvania; and
29 N. Washington Street, Gettysburg, Adams County, Pennsylvania. In addition
thereto, PSB leases offices at 600 Carlisle Street, Hanover, York County,
Pennsylvania, pursuant to a lease which, with renewal options, will extend to
the year 2006; 509 Greenbriar Road, Gettysburg, Adams County, Pennsylvania,
pursuant to a lease which, with renewal options, will extend to the year 2029;
and 460 High Street, Hanover, York County, Pennsylvania, pursuant to a lease
which, with renewal options, will extend to the year 2002. PSB also owns real
property through its subsidiary, PSB Realty, at the following locations: 1191
Eichelberger Street, Hanover, York County, Pennsylvania; 155 Glen Drive,
Manchester, York County, Pennsylvania; 1345 Baltimore Street, Hanover, York
County, Pennsylvania; 5625 York Road, New Oxford, Adams County, Pennsylvania;
and 2508 Eastern Boulevard, York, York County, Pennsylvania.
PSB Realty owns the following property for the purpose of future expansion:
Centennial Commons, McSherrystown, Adams County, Pennsylvania.
All the buildings used by PSB are free-standing and are used exclusively
for banking purposes with the exception of offices and retail space rented at
the Carlisle Street, Hanover location and the High Street, Hanover location.
6
From time to time, the subsidiary banks also acquire real estate by virtue
of foreclosure proceedings, such real estate is disposed of in the usual and
ordinary course of business as expeditiously as is prudently possible.
Item 3. Legal Proceedings:
There are no material pending legal actions, other than litigation
incidental to the business of the Corporation, to which the Corporation is a
party.
Item 4. Submission of Matters to a Vote of Security Holders:
- -------------------------------------------------------------
No matters were submitted to a vote of security holders during the fourth
quarter of 2000.
APPENDIX A
RETURN ON EQUITY AND ASSETS
FOR THE YEARS ENDED December 31, 2000, 1999, 1998, 1997, AND 1996
-----------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Return on average equity 16.84% 15.41% 13.04% 11.49% 11.39%
Return on average assets 1.22% 1.29% 1.31% 1.16% 1.18%
Average equity to average assets 7.24% 8.35% 10.06% 10.12% 10.36%
Dividend payout ratio 35.79% 36.80% 40.83% 39.66% 39.02%
7
APPENDIX A
Continued
AMORTIZED COST AND ESTIMATED VALUES OF INVESTMENT
SECURITIES
(dollars in thousands)
At December 31, 2000, 1999, and 1998
2000 1999 1998
---------------------- --------------------- -------------------------
Estimated Estimated Estimated
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
---------------------- --------------------- -------------------------
Mortgage-backed U.S. government agencies $ 59,827 $ 59,697 $ 61,788 $ 58,961 $ 82,887 $ 83,260
U.S. Government corporations and agencies 129,200 126,110 132,661 123,919 78,800 79,449
Obligations of states and political sub-
divisions 95,376 96,615 84,778 78,853 85,771 87,676
Corporate securities 38,447 38,643 31,739 31,876 27,574 27,459
Equity securities 21,430 21,790 17,797 18,466 13,284 14,698
---------- ---------- --------- --------- ---------- ----------
Total $344,280 $342,855 $328,763 $312,075 $288,316 $292,542
========== ========== ========= ========= ========== ==========
COMMUNITY BANKS, INC. AND SUBSIDIARIES
MATURITY DISTRIBUTION OF SECURITIES (Fair Value)
(dollars in thousands)
as of December 31, 2000
One Five Weighted
Within Through Through After Average Average
One Year Five Years Ten Years Ten Years Total Maturity Yield (a)
-------------------------------------------------------------------------------------
U.S. Government agencies $12,791 $43,847 $67,606 $ 61,563 $185,807 15yr. 4 mos. 6.89%
Obligations of states and political
Subdivisions 3,438 15,42 14,153 63,602 96,615 17yr. 8 mos. 8.12%
Other 21,790 8,162 3,846 26,635 60,433 14yr. 0 mos. 6.29%
-------- --------- ---------- ---------- ----------
Total $38,019 $67,431 $85,605 $151,800 $342,855 15yr. 9 mos. 7.13%
====== ====== ====== ======= =======
Percentage of total 11.1% 19.6% 25.0% 44.3% 100%
===== ===== ===== ===== =====
Weighted average yield (a) 4.85% 7.17% 7.03% 7.73% 7.13%
===== ===== ===== ===== =====
(a) Weighted average yields were computed on a tax equivalent basis using a
federal tax rate of 35%.
The Corporation monitors investment performance and valuation on an ongoing
basis to evaluate investment
8
quality. An investment which has experienced a decline in market value
considered to be other than temporary is written down to its net realizable
value and the amount of the write down is accounted for as a realized loss.
LOAN ACCOUNT COMPOSITION
(dollars in thousands)
as of December 31
2000 1999 1998 1997 1996
----------------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
Commercial, financial and agricultural $124,239 17.8% $100,970 16.9% $ 65,698 12.8% $ 53,520 11.8% $ 52,844 12.6%
Real-estate-construction 20,230 2.9 14,670 2.5 17,381 3.4 5,553 1.2 5,724 1.4
Real estate-mortgage 434,315 62.4 362,297 60.8 324,709 63.4 299,529 65.7 268,276 63.8
Personal-installment 107,554 15.4 109,841 18.4 97,561 19.0 88,046 19.3 87,381 20.8
Other 10,161 1.5 8,523 1.4 6,931 1.4 9,182 2.0 5,982 1.4
----------------------------------------------------------------------------------------------
696,499 100.0% 596,301 100.0% 512,280 100.0% 455,830 100.0% 420,207 100.0%
------- ===== ------- ===== ------- ===== ------- ===== ------- =====
Less:
Unearned discount (3,984) (6,986) (10,018) (11,799) (11,965)
Reserve for loan losses (8,471) (7,456) (6,954) (6,270) (5,561)
------- ------- ------ ------- -----
$684,044 $581,859 $495,308 $437,761 $402,681
======= ======= ======= ======= =======
The Corporation's loan activity is principally with customers located within the
local market area. The Corporation continues to maintain a diversified loan
portfolio and has no significant loan concentration in any economic sector.
Changes in loan demand in 2000 resulted in increases in commercial, financial,
and agricultural loans of 23.0%. Personal installment loans declined 2.1% while
real estate loans increased 20.6% during this same period. Commercial,
financial, and agricultural loans represented 17.8% of total loans at December
31, 2000 and consist principally of commercial lending secured by financial
assets of businesses including accounts receivable, inventories and equipment,
and, in most cases, include liens on real estate. Real estate construction and
mortgage loans are primarily 1 to 4 family residential loans secured by
residential properties within the bank's market area. Personal- installment
loans comprised 15.4% of total loans at December 31, 2000 and consist
principally of secured loans for items such as automobiles, property
improvement, household and other consumer goods. The Corporation continues to
sell fixed rate mortgages in the secondary market to avoid associated interest
rate risk. Historically, relative credit risk of commercial, financial and
agricultural loans has generally been greater than that of other types of loans.
9
APPENDIX A
Continued
MATURITIES AND SENSITIVITY TO CHANGES IN INTEREST
RATES FOR COMMERCIAL, FINANCIAL AND AGRICULTURAL
AND REAL-ESTATE CONSTRUCTION LOANS
(dollars in thousands)
as of December 31, 2000
Maturity Distribution
One Year One to Over Five
Or Less Five Years Years Total
--------- ---------- ---------- -----
Commercial, financial and
agricultural $61,099 $45,328 $17,812 $124,239
Real estate-construction 11,138 9,092 --- 20,230
------ ------ ------ -------
$72,237 $54,420 $17,812 $144,469
====== ====== ====== =======
Interest Sensitivity
Variable Fixed Total
-------- ------- -------
Due in one year or less $ 77,637 $ 2,845 $ 80,482
Due after one year 53,689 10,298 63,987
------- ------ -------
$131,326 $13,143 $144,469
======= ====== =======
10
APPENDIX A
Continued
NON-PERFORMING LOANS (a)
(dollars in thousands)
as of December 31
------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Loans past due 90 days or more:
Commercial, financial and agricultural $ 8 $ 146 $ 47 $ 53 $ 20
Mortgages 495 147 353 405 588
Personal installment 98 73 34 72 189
Other 11 12 7 21 11
--------- --------- ---------- ------- ---------
612 378 441 551 808
-------- -------- -------- ------ --------
Loans renegotiated with borrowers 205 254 248 626 277
Loans on which accrual of interest has been discontinued:
Commercial, financial and agricultural 1,364 435 866 926 791
Mortgages 3,375 3,079 2,282 3,388 3,645
Other 356 222 282 300 318
-------- -------- -------- ------- --------
5,095 3,736 3,430 4,614 4,754
------- ------- ------- ------ -------
Other real estate owned 393 405 625 866 883
-------- -------- -------- ------- --------
Total $6,305 $4,773 $4,744 $6,657 $6,722
===== ===== ===== ===== =====
(a) The determination to discontinue the accrual of interest on
non-performing loans is made on the individual case basis. Such factors as the
character and size of the loan, quality of the collateral and the historical
creditworthiness of the borrower and/or guarantors are considered by management
in assessing the collectibility of such amounts.
The approximate amount that would have been accrued on those loans for which
interest was discontinued in 2000 was $363,000. Interest income from these loans
would have approximated $305,000 in 1999.
The change in non-performing loans is primarily a result of the impact of
economic conditions upon the loan portfolio. The economic outlook remains
uncertain. If the economy in the Corporation's trading area improves this could
have a positive impact on delinquency trends and collectibility of loans.
However, the commercial real estate market in the Corporation's trading area
remains stagnant. The ability of borrowers to liquidate collateral is
11
dependent upon the demand for commercial real estate projects and a buyer's
ability to finance commercial real estate projects.
APPENDIX A
-----------
Continued
LOAN LOSS EXPERIENCE
(dollars in thousands)
For the years ended December 31, 2000, 1999, 1998, 1997, and 1996
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Loans at year-end, net of unearned income $692,515 $598,315 $502,262 $444,031 $408,242
======= ======= ======= ======= =======
Average loans balance (a) $645,716 $548,293 $467,094 $421,283 $385,956
======= ======= ======= ======= =======
Balance, allowance for loan losses,
January 1 $ 7,456 $ 6,954 $ 6,270 $ 5,561 $ 4,955
Net charge-offs (b) (1,293) (796) (780) (608) (961)
Provision for loan losses, 2,308 1,298 1,464 1,317 1,567
----------- --------- --------- --------- ---------
Balance, allowance for loan losses,
December 31 $ 8,471 $ 7,456 $ 6,954 $ 6,270 $ 5,561
======= ======= ======= ======= =======
Net charge-offs to loans at year end .19% .13% .16% .14% .24%
Net charge-offs to average loans (a) .20% .15% .17% .14% .25%
Balance of allowance for loan losses
to loans at year end 1.22% 1.25% 1.38% 1.41% 1.36%
(a) Averages are a combination of monthly and daily averages.
(b) For detail, see Schedule of Loans Charged Off and Recovered.
The allowance for loan losses is based upon management's continuing evaluation
of the loan portfolio. A review as to loan quality, current macro-economic
conditions and delinquency status is performed at least on a quarterly basis.
12
The provision for loan losses is adjusted quarterly based upon current review.
The table on page 10 presents an allocation by loan categories of the allowance
for loan losses at December 31 for the last five years. In retrospect, the
specific allocation in any particular category may prove excessive or inadequate
and consequently may be reallocated in the future to reflect the then current
condition. Accordingly, the entire allowance is available to absorb losses in
any category.
As discussed in the Corporation's Annual Report, the Corporation adopted SFAS
114, as amended by SFAS 118, on January 1, 1995. The adoption of SFAS 114 did
not result in any additional provision for loan losses.
The amount of the allowance assigned to each component of the loan portfolio is
derived from a combination of factors. Estimation methods and assumptions used
in the process are received periodically by both management and a committee of
the board of directors. In general, the allowance was not materially affected by
changes in these estimation methods and assumptions during 2000.
Specific allocations are provided for individual loans which are rated below an
acceptable standard by management. In addition, specific allocations are
provided for individual loans which have been placed on nonaccrual status.
Additional allocations for loan components are also dependent upon the
delinquencies of pools of loans. Analysis of losses by loan grouping over the
most recent three year period also impacts components of the allowance. The
components which result from these processes are combined and compared to the
relationship of historical losses and balances of the allowance from a total
portfolio perspective. Any necessary difference is categorized as unallocated.
During 2000 management deemed it appropriate to reduce the relative portion of
the total allowance allocated to real estate-mortgage loans to 14% from 16% at
year-end 1999. The corporation has accompanied the downward trends in the
relationships of net charge-offs to average loans and non-performing loans with
a reduction in the relationship of the allowance to total loans.
The provision for loan losses totaled $2,308,000 for the year ended December 31,
2000, compared to $1,298,000, $1,464,000, $1,317,000, and $1,567,000 for the
years ended December 31, 1999, 1998, 1997, and 1996, respectively. The
relationship of the allowance for loan losses to loans at year end approximated
1.22% compared to ratios of 1.25% to 1.41% for the previous four years. In
reviewing the adequacy of the allowance for loan losses, management considered
the relationship of nonaccrual loans, renegotiated loans, other real estate
owned, and accruing loans contractually past due 90 days or more to total
assets. This relationship approximated .56%, .49%, .56%, .93%, and 1.03% at
year-end 2000, 1999, 1998, 1997, and 1996, respectively.
13
APPENDIX A
Continued
LOANS CHARGED OFF AND RECOVERED
(dollars in thousands)
For the years ended December 31, 2000, 1999, 1998, 1997, and 1996
-----------------------------------------------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Loans charged off:
Commercial, financial and agricultural $ 252 $ 78 $ 138 $ 83 $ 165
Real estate-mortgage 443 190 223 361 382
Personal installment 103 883 820 926 1,327
Other 886 81 77 96 93
-------- --------- --------- ------- -------
Total 1,684 1,232 1,258 1,466 1,967
------- ------- ------- ----- -----
Loans recovered:
Commercial, financial and agricultural 3 137 53 428 336
Real estate-mortgage 83 43 104 63 131
Personal installment 295 239 296 343 509
Other 10 17 25 24 30
--------- --------- --------- --------- ---------
Total 391 436 478 858 1,006
-------- -------- -------- -------- -------
Net charge-offs $1,293 $ 796 $ 780 $ 608 $ 961
===== ===== ===== ===== =====
ALLOCATION OF
ALLOWANCE FOR LOAN LOSSES*
(dollars in thousands)
as of December 31
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Loans:
Commercial, financial and agricultural $4,360 $2,286 $2,199 $1,663 $1,541
Real estate-construction 6 2 --- --- 2
Real estate-mortgage 1,188 1,178 1,366 1,780 1,868
Installment 1,293 1,203 1,161 1,458 1,125
Unallocated 1,624 2,787 2,228 1,369 1,025
------- ------- ------- ------- --------
Balance $8,471 $7,456 $6,954 $6,270 $5,561
===== ===== ===== ===== =====
*See Schedule "Loan Account Composition" for the percent of loan classification
to total loans.
14
APPENDIX A
Continued
MATURITY DISTRIBUTION OF TIME
DEPOSITS OF $100,000 OR MORE
(dollars in thousands)
as of December 31, 2000
-------------------------
Remaining to Maturity:
Less than three months $15,267
Three months to six months 17,611
Six months to twelve months 20,520
More than twelve months 18,224
--------
$71,622
======
MATURITY DISTRIBUTION OF ALL
TIME DEPOSITS
(dollars in thousands)
as of December 31, 2000
-------------------------
Remaining Maturity:
One year or less $287,388
After one year through two years 77,823
After two years through three years 35,053
After three years through four years 19,033
After four years through five years 12,940
After five years 2,181
-----------
$434,418
=======
15
APPENDIX A
Continued
INTEREST RATE SENSITIVITY
The excess of interest-earning assets over interest-bearing liabilities
which are expected to mature or reprice within a given period is commonly
referred to as the "GAP" for that period. For an institution with a positive
GAP, the amount of income earned on its assets fluctuates more than the cost of
its liabilities in response to changes in the prevailing rates of interest
during the period. Accordingly, in a period of decreasing interest rates,
institutions with a positive GAP will experience a greater decrease in the yield
on their assets than in the cost of their liabilities. Conversely, in a period
of rising interest rates, institutions with a positive GAP face a greater
increase in the yield on their assets than in the cost of their liabilities. An
increasing interest rate environment is favorable to institutions with a
positive GAP because more of their assets than their liabilities adjust during
the period and, accordingly, the increase in the yield of their assets is
greater than the increase in the cost of their liabilities.
The positive GAP between the Corporation's interest-earning assets and
interest-bearing liabilities maturing or repricing within one year approximated
4% of total assets at December 31, 2000.
Significant maturity/repricing assumptions (based on internal analysis)
include the presentation of all savings, Money Market, and NOW accounts as being
32% interest rate sensitive . Equity securities are reflected in the shortest
time interval. Assumed pay downs on mortgage-backed securities and loans have
also been included in all time intervals.
The following table sets for the scheduled repricing or maturity of the
Corporation's interest-earning assets and interest-bearing liabilities at
December 31, 2000.
16
APPENDIX A
Continued
Interest Rate Sensitivity
- ------------------------------------------------------------------------------------------------------------------------------------
At December 31, 2000 1-90 90-180 180-365 1 year
Dollars in thousands days days days or more Total
- ------------------------------------------------------------------------------------------------------------------------------------
Assets
Interest-bearing deposits in
other banks $ 2,275 ---- ---- ---- $ 2,275
Investment securities 62,048 $ 2,334 $ 5,590 $272,883 342,855
Loans, net of unearned income* 183,678 79,068 88,405 341,364 692,515
Loans held for sale 2,719 ---- ---- ---- 2,719
- ------------------------------------------------------------------------------------------------------------------------------------
Total $250,720 $ 81,402 $ 93,995 $614,247 $1,040,364
- ------------------------------------------------------------------------------------------------------------------------------------
Liabilities
Savings $ 65,525 ---- ---- $134,508 $ 200,033
Time 60,141 $64,815 $109,034 128,806 362,796
Time in denominations of
$100,000 or more 15,267 17,611 20,520 18,224 71,622
Short-term borrowings 21,593 ---- ---- ---- 21,593
Long-term debt 1,934 ---- ---- 223,000 224,934
- ------------------------------------------------------------------------------------------------------------------------------------
Total 164,460 $ 82,426 $ 129,554 $ 504,538 $ 880,978
- ------------------------------------------------------------------------------------------------------------------------------------
Interest Sensitivity Gap
Periodic $ 86,260 $ (1,024) $(35,559) $ 109,709
Cumulative 85,236 49,677 159,386
Cumulative gap as a percentage
of earning assets 8% 8% 5% 15%
*Does not include nonaccrual loans.
17
APPENDIX A
Continued
Forward-Looking Statements:
- --------------------------
Certain statements in this document may be considered to be
"forward-looking statements" as that term is defined in the U.S. Private
Securities Litigation Reform Act of 1995, such as statements that include the
words "expect", "estimate", "project", "anticipate", "should", "intend",
"probability", "risk", "target", "objective", and similar expressions or
variations on such expressions. In particular, this document includes
forward-looking statements relating, but not limited to, the Corporation's
potential exposures to various types of market risks such as interest rate risk
and credit risk. Such statements are subject to certain risks and uncertainties.
For example, certain of the market risk disclosures are dependent on choices
about key model characteristics and assumptions and are subject to various
limitations. By their nature, certain of the market risk disclosures are only
estimates and could be materially different from what actually occurs in the
future. As a result, actual income gains and losses could materially differ from
those that have been estimated. Other factors that could cause actual results to
differ materially from those estimated by the forward-looking statements
contained in this document include, but are not limited to: general economic
conditions in market areas which the Corporation has significant business
activities or investments; the monetary and interest rate policies of the Board
of Governors of the Federal Reserve System; inflation; deflation; unanticipated
turbulence in interest rates; changes in laws, environments; natural disasters;
the inability to hedge certain risks economically; the adequacy of loan
reserves; acquisitions or restructurings, technological changes in consumer
spending and savings habits; and the success of the Corporation in managing the
risks involved in the foregoing.
Quantitative and Qualitative Disclosures About Market Risk
- ----------------------------------------------------------
Community Banks, Inc. has only a limited involvement with derivative
financial instruments and does not use them for trading purposes. The business
of the Corporation and the composition of its balance sheet consists of
investments in interest-earning assets (primarily loans, mortgage-backed
securities and investment securities) which are primarily funded by
interest-bearing liabilities (deposits and borrowings). Such financial
instruments have varying levels of sensitivity to changes in market interest
rates resulting in market risk. Other than loans which are originated and held
for sale, all of the financial instruments of the Corporation are for other than
trading purposes.
18
Interest rate sensitivity results when the maturity or repricing intervals
of interest-earning assets, interest-bearing liabilities, and off-balance sheet
financial instruments are different, creating a risk that changes in the level
of market interest rates will result in disproportionate changes in the value
of, and the net earnings generated from, the Corporation's interest-earning
assets, interest-bearing liabilities, and off-balance sheet financial
instruments. The Corporation's exposure to interest rate sensitivity is managed
primarily through the Corporation's strategy of selecting the types and terms of
interest-earning assets and interest-bearing liabilities which generate
favorable earnings, while limiting the potential negative effects of changes in
market interest rates. Since the Corporation's primary source of
interest-bearing liabilities is customer deposits, it's ability to manage the
types and terms of such deposits may be somewhat limited by customer preferences
in the market areas in which it operates. Borrowings, which include Federal Home
Loan Bank (FHLB) advances and short-term loans, subordinated notes, and other
short-term and long-term borrowings are generally structured with specific terms
which in management's judgement, when aggregated with the terms for outstanding
deposits and matched with interest-earning assets, mitigate the Corporation's
exposure to interest rate sensitivity.
The rates, terms and interest rate indices of the Corporation's
interest-earning assets result primarily from its strategy on investing in loans
and securities (a substantial portion of which have adjustable-rate terms) which
permit the Corporation to limit its exposure to interest rate sensitivity,
together with credit risk, while at the same time achieving a positive interest
rate spread compared to the cost of interest-bearing liabilities.
Significant Assumptions Utilized in Managing Interest Rate Sensitivity
- ----------------------------------------------------------------------
Managing the Corporation's exposure to interest rate sensitivity involves
significant assumptions about the exercise of imbedded options and the
relationship of various interest rate indices of certain financial instruments.
Imbedded Options
- ----------------
A substantial portion of the Corporation's loans and mortgage-backed
securities and residential mortgage loans contain significant imbedded options
which permit the borrower to prepay the principal balance of the loan prior to
maturity ("prepayments") without penalty. A loan's propensity for prepayment is
dependent upon a number of factors, including the current interest rate and
interest rate index (if any) of the loan, the financial ability of the borrower
to refinance, the economic benefit to be obtained from refinancing, availability
of refinancing at attractive terms, as well as economic and other factors in
specific geographic areas which affect the sales and price levels of residential
property. In a changing interest rate environment, prepayments may increase or
decrease on fixed and adjustable-rate loans pursuant to the current relative
levels and expectations of future short and long-term interest rates. Since a
significant portion of the Corporation's loans are variable rate loans,
prepayments on such loans generally increase when long-term interest rates fall
or are at historically low levels relative to short-term interest rates making
fixed-rate loans more desirable.
Investment securities, other than mortgage-backed securities and those with
early call provisions, generally do not have significant imbedded options and
repay pursuant to specific terms until maturity. While savings and checking
19
deposits generally may be withdrawn upon the customer's request without prior
notice, a continuing relationship with customers resulting in future deposits
and withdrawals is generally predictable resulting in a dependable and
uninterrupted source of funds. Time deposits generally have early withdrawal
penalties, while term FHLB borrowings and subordinated notes have prepayment
penalties, which discourage customer withdrawal of time deposits and prepayment
of FHLB borrowings and subordinated notes prior to maturity.
Interest Rate Indices
- ---------------------
The Corporation's loans and mortgage-backed securities are primarily
indexed to the national interest indices. When such loans and mortgage-backed
securities are funded by interest-bearing liabilities which are determined by
other indices, usually deposits and FHLB borrowings, a changing interest rate
environment may result in different levels of changes in the indices leading to
disproportionate changes in the value of, and net earnings generated from, the
Corporation's financial instruments. Each index is unique and is influenced by
different external factors, therefore, the historical relationships in various
indices may not be indicative of the actual change which may result in a
changing interest rate environment.
Interest Rate Sensitivity Measurement
- -------------------------------------
In addition to periodic gap reports comparing the sensitivity of
interest-earning assets and interest-bearing liabilities to changes in interest
rates, management also utilizes a report which measures the exposure of the
Corporation's economic value of equity to interest rate risk. The model
calculates the present value of assets, liabilities and equity at current
interest rates, and at hypothetically higher and lower interest rates at one
percent intervals. The present value of each major category of financial
instruments is calculated by the model using estimated cash flows based on
prepayments, early withdrawals, weighted average contractual rates and terms,
and discount rates for similar financial instruments. The resulting present
value of longer term fixed-rate financial instruments are more sensitive to
change in a higher or lower interest rate scenario, while adjustable-rate
financial instruments largely reflect only a change in present value
representing the difference between the contractual and discounted rates until
the next interest rate repricing date.
The following table reflects the estimated present value of assets,
liabilities and equity financial instruments using the model for Community
Banks, Inc. as of December 31, 2000 consolidated with the estimated present
values of other financial instruments of the Corporation, at current interest
rates and hypothetically, higher and lower interest rates of one and two
percent.
Base
-2% -1% Present Value +1% +2%
--------------------------------------------------------------------------------
Assets (dollars in thousands)
Cash, interest-bearing time deposits,
and federal funds sold $ 40,422 $ 40,422 $ 40,422 $ 40,422 $ 40,422
Investment securities 356,728 350,984 342,855 315,583 298,521
Loans, net of unearned income 697,866 686,599 675,879 665,673 655,949
Loans held for sale 2,807 2,762 2,719 2,678 2,639
Other assets 51,332 51,332 51,332 51,332 51,332
--------- ----------- ------------- ----------- ------------
Total assets $1,149,155 $1,132,099 $1,113,207 $1,075,688 $1,048,863
========= ========= ========= ========= =========
Liabilities
Deposits $ 785,871 $ 781,121 $ 776,428 $ 771,791 $ 767,209
Short-term borrowings 21,593 21,593 21,593 21,593 21,593
Long-term debt 233,625 229,184 224,895 220,753 216,751
Other liabilities 8,456 8,456 8,456 8,456 8,456
----------- ----------- ----------- ----------- -----------
Total liabilities 1,049,545 1,040,354 1,031,372 1,022,593 1,014,009
----------- ----------- ----------- ----------- -----------
Total stockholders' equity 99,610 91,745 81,835 53,095 34,854
----------- ----------- ----------- ----------- -----------
Total liab. and stockholders'
equity $1,149,155 $1,132,099 $1,113,207 $1,075,688 $1,048,863
=========== =========== =========== =========== ===========
20
PART II
Item 5. Market for Registrant's Common Stock and Related Stockholder Matters:
- ------- ---------------------------------------------------------------------
Incorporated by reference is the information appearing under the heading
"Market for the Corporation's Common Stock and Related Securities Holder
Matters" on page 26 of the Annual Report to Stockholders for the year ended
December 31, 2000 (hereafter referred to as the "Annual Report").
Item 6. Selected Financial Data
- ------- -----------------------
Incorporated by reference is the information appearing under the heading
"Financial Highlights" on page 5 of the Annual Report.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations:
- ------- -----------------------------------------------------------
Incorporated by reference is the information appearing under the headings
"Rate/Volume Analysis"; "Average Balances, Effective Interest Differential and
Interest Yields"; and "Management's's Discussion of Financial Condition and
Results of Operations" on pages 21 through 26 of the Annual Report.
Item 8. Financial Statements and Supplementary Data:
- ------- --------------------------------------------
The consolidated financial statements, together with the report thereon of
PricewaterhouseCoopers LLP dated January 18, 2001, are incorporated by
references to pages 6 through 20 of the Annual Report.
21
Item 9. Disagreements on Accounting and Financial Disclosures:
- ------- ------------------------------------------------------
None.
PART III
Item 10. Directors and Executive Officers of the Registrant:
- --------- ---------------------------------------------------
The following table sets forth the name and age of each director of
Community Banks, Inc. as well as the director's business experience, including
occupation for the past 5 years, the period during which he has served as a
director of Community Banks, N.A. (Formerly Upper Dauphin National Bank), and
the number and percentage of outstanding shares of Common Stock of the Bank
beneficially owned by said directors as of December 31, 2000.
Business Experience Amount and Percentage of
Including Principal Nature of Outstanding
Occupation for the Director Beneficial Common Stock
Name and Age Past Five Years Since (1) Ownership (2) Owned
- ------------- --------------- -------- ------------- ---------------
Ernest L. Lowe Chairman-CTY/CBNA/ 1990 55,236 .78%
Age 64 PSB (8)
Prior to 12/31/97
Pres. of CTY &
Ex.V.P. of CBNA
Eddie L. Dunklebarger President/CEO 1998 151,027 2.15%
Age 47 CTY/CBNA/PSB (15)
Prior to 3/31/98
Pres/CEO PSB
Thomas L. Miller Retired Chairman/ 1966 73,421 1.04%
Age 68 CEO of CTY & (9)
CBNA
Kenneth L. Deibler Self-Employed 1966 35,529 .50%
Age 78 Insurance Broker
Elizabethville, PA
Robert W. Rissinger Sec./Treasurer 1968 269,118 3.82%
Age 74 Alvord Polk Tool Co. (3) (4)
(Cutting Tools)
Engle Rissinger Auto Group
Millersburg, PA
Allen Shaffer Attorney-at-Law 1961 52,184 .74%
Age 75 Millersburg and (6)
Harrisburg, PA
22
Business Experience Amount and Percentage of
Including Principal Nature of Outstanding
Occupation for the Director Beneficial Common Stock
Name and Age Past Five Years Since (1) Ownership (2) Owned
- ------------- --------------- --------- ------------- ------------------
James A. Ulsh Attorney-at-Law 1977 17,998 .26%
Age 54 Mette, Evans &
Woodside
Harrisburg, PA
Samuel E. Cooper Retired Superintendent 1992 2,415 .03%
Age 67 Warrior Run School
District
Turbotville, PA
Susan K. Nenstiel Regional Dir. Of Dev. 1996 236 ---
Age 49 Lutheran Welfare Serv.
Hazleton, PA
Ronald E. Boyer President, 1981 25,874 .37%
Age 63 Alvord-Polk Tool Co. (5)
(Manufacturing of Cutting tools)
Millersburg, PA.
Peter DeSoto CEO, J.T. Walker 1981 48,697 .69%
Age 61 Industries, Inc.
(manufacturing of metal
products)
Elizabethville, PA
Thomas W. Long Partner 1981 10,591 .15%
Age 71 Millersburg Hardware
Millersburg PA
Donald L. Miller President, Miller Bros. 1981 97,023 1.38%
Age 71 Dairy
Millersburg, PA
Ray N. Leidich Retired Dentist 1985 74,390 1.06%
Age 72 Tremont, PA (7)
23
Business Experience Amount and Percentage of
Including Principal Nature of Outstanding
Occupation for the Director Beneficial Common Stock
Name and Age Past Five Years Since (1) Ownership (2) Owned
- ------------- --------------- --------- ------------- -------------------
John W. Taylor, Jr. President-Air Brake 1998 22,343 .32%
Age 70 & Power Equip. Co. (12)
Earl L. Mummert Consulting Actuary 1998 30,941 .44%
Age 56 Conrad M. Siegel, Inc (13)
Wayne H. Mummert Retired U.S. Postal 1998 74,278 1.06%
Age 67 Service/Farmer (14)
(1) Includes service as a director of CBNA (formerly Upper Dauphin National
Bank), a wholly-owned subsidiary of the Corporation, prior to 1983 and service
as a director of the Corporation after 1983.
(2) The securities "beneficially owned" by an individual are determined in
accordance with the definition of "beneficial ownership" set forth in the
regulations of the Securities and Exchange Commission. Accordingly, they may
include securities owned by or for, among others, the wife and/or children of
the individual and any other relative who has the same home as such individual,
as well as other securities which the individual has or shares voting or
investment power or has the right to acquire under outstanding stock options
within 60 days after December 31, 2000. Beneficial ownership may be disclaimed
as to certain of the securities.
(3) Includes 7,365 shares owned by Alvord-Polk Tool Co., Inc. the stock of which
is held 50% by Robert Rissinger and 50% by Ronald E. Boyer.
(4) Includes 16,412 shares owned by Engle Ford, Inc., 48,070 shares owned by Mr.
Rissinger's spouse, Shirley Rissinger, and 11,661 shares owned by Engle Ford,
Inc. Profit Sharing Plan and 88,128 shares held by Mr. Rissinger's IRA.
(5) Includes 7,365 shares owned by Alvord-Polk Tool Co., Inc., the stock of
which is held 50% by Robert W. Rissinger and 50% by Ronald E. Boyer, and 579
shares owned by Mr. Boyer's wife, Judith Boyer.
(6) Includes 4,784 shares owned by Mr. Shaffer's Retirement plan.
(7) Includes 37,195 shares owned by Dr. Leidich's wife, Dolores Leidich.
(8) Includes 205 shares owned by Mr. Lowe's wife, Barbara and 25 shares owned by
Mr. Lowe's son and incentive stock options to acquire 36,920 shares, 228 shares
held in Mr. Lowe's 401K and 1,613 shares held in his IRA.
(9) Includes incentive stock options to acquire 39,265 shares and 913 in his
IRA.
24
(10) Includes incentive stock options to acquire 18,138 shares and 14 shares
registered to Mr. Lawley for his minor children.
(11) Includes incentive stock options to acquire 7,430 shares and 80 shares held
in his ESPP.
(12) Includes 1,333 shares owned by Mr. Taylor's wife, LouAnn and 953 shares in
his IRA.
(13) Includes stock options to acquire 2,208 shares and 20,812 shares in Mr.
Mummert's IRAs.
(14) Includes stock options to acquire 2,208 shares and 16,671 shares owned by
Mr. Mummert's wife Shirley.
(15) Includes 348 shares owned by Mr. Dunklebarger's wife, Connie, 10,996 shares
owned by Mr. Dunklebarger's children, 10,981 shares in his 401(k) plan, 9,549
shares in his IRA, and 88,007 stock options (ISO and NQ's) to acquire shares and
365 shares held in ESPP.
(16) Includes 4,426 shares in his 401(k) plan and 9,959 (ISO and NQ) stock
options to acquire shares.
(17) Includes 5,723 shares in his 401(k) plan and 8,254 shares in his IRA, and
29,272 stock options to acquire shares and 275 shares held in ESPP.
Section 16(a) Beneficial Ownership Reporting Compliance
25
In 2000, to the knowledge of the Corporation, all Executive Officers and
directors timely filed all reports with the Securities and Exchange Commission.
None of the directors or nominee directors are directors of other companies
with a class of securities registered pursuant to Section 12 of the Securities
Exchange Act of 1934.
26
Executive Officers:
The following table sets forth the executive officers of Community Banks,
Inc., their ages, their positions with Community Banks, Inc. and the beneficial
ownership (as determined in accordance with the rules and regulations of the
Securities and Exchange Commission) of Common Stock of the Corporation owned by
each of such persons as of December 31, 2000.
Business Experience Amount and Percentage of
Including Principal Nature of Outstanding
Occupation for the Beneficial Common Stock
Name and Age Past Five Years Term (1) Ownership (2) Owned
- ------------- --------------- -------- ------------- ----------------
Ernest L. Lowe Chairman-CTY/ 1985 55,236 .78%
Age 64 CBNA/PSB (8)
Prior to 12/31/97
Ex. V.P. of CBNA &
Pres. of CTY
Eddie L. Dunklebarger President/CEO 1998 151,027 2.15%
Age 47 CTY/CBNA/PSB (15)
Prior to 3/31/98
Pres/CEO of PSB
Terry L. Burrows Executive Vice President/ 1977 30,425 .43%
Age 52 Finance (11)
Robert W. Lawley Executive Vice President/ 1980 18,218 .26%
Age 46 Operations (10)
Anthony N. Leo Executive Vice President/ 1998 14,475 .21%
Age 40 Fin. Services & Adm. (16)
Jeffrey M. Seibert Executive Vice President/ 1998 51,850 .73%
Age 41 Banking Services (17)
(1) Initial year employed in this capacity.
27
The following is all shares beneficially owned by all directors and
executive officers of the Corporation as a group:
Amount and Nature
of Beneficial
Ownership (1)(2)
---------------
Percent
Title of Class Direct Indirect (3) of Class
-------------- ------ ----------- --------
Common 1,062,176 175,782 16.96%
(1) See footnote 2 on page 24.
(2) Included in these totals are shares held by director emeriti of the
Corporation as follows: Leon E. Kocher - 29,991 shares which includes 13,563
shares held by Mr. Kocher's wife, Margaret. Joseph J. Monahan - 22,848 shares.
Harry B. Nell - 36,215 shares which includes 917 shares held by Mr. Nell's wife,
Helen, and stock options to acquire 2,208 shares.
(3) The 7,365 shares owned by Alvord-Polk, Inc. are counted only once in this
total. Alvord-Polk, Inc. is 50% owned by Robert W. Rissinger and 50% owned by
Ronald E. Boyer. Thus, these shares are indicated above as being beneficially
owned by both Mr. Rissinger and Mr. Boyer.
Item 11. Executive Compensation:
- ------- ----------------------
Information regarding executive compensation is omitted from this report as
the holding company will file a definitive proxy statement for its annual
meeting of shareholders to be held May 1, 2001; and the information included
therein with respect to this item is incorporated herein by reference.
Pension Plan:
- ------------
CBNA maintains a pension plan for some of its employees. Employees hired
prior to December 31, 1998 became participants in the pension plan on January 1
or July 1 after completing one year of service (12 continuous months) and
reaching age 21. The cost of the pension is actuarially determined and paid by
CBNA. The amount of monthly pension is equal to 1.15% of average monthly pay up
to $650, plus .60% of average monthly pay in excess of $650, multiplied by the
number of years of service completed by an employee. The years of service for
the additional portion are limited to a maximum of 37. Average monthly pay is
based upon the 5 consecutive plan years of highest pay preceding retirement. The
maximum amount of annual compensation used in determining retirement benefits is
$170,000. A participant is eligible for early retirement after reaching age of
60 and completing five years of service. The early retirement benefit is the
actuarial equivalent of the pension accrued to the date of early retirement. As
of December 31, 2000 the following officers have been credited with the
following years of service: Ernest L. Lowe-16 years of service, Robert W.
Lawley-25 years of service, and Terry L. Burrows-27 years of service.
In 1999, the Board of Directors amended the plan so that pension benefits will
be offset by employer contributions to the CTY 401(k) Plan. Employees hired
after 12/31/98 are not eligible to participate in the CBNA Pension Plan. The
amounts shown on the following table assumes an annual retirement benefit for an
employee who chose a straight life annuity and who will retire at age 65. These
amounts are offset for the employer contribution in the 401(k) Plan.
28
PENSION PLAN TABLE
Years of Service
- ------------------------------------------------------------------------------------------------------------------------------------
15 20 25 30 35 40
- ------------------------------------------------------------------------------------------------------------------------------------
Remuneration
$35,000...................... $ 8,486 $11,314 $14,143 $16,971 $19,800 $ 22,138
$55,000...................... $13,736 $18,314 $22,893 $27,471 $32,050 $ 35,778
$75,000...................... $18,986 $25,314 $31,643 $37,971 $44,300 $ 49,418
$95,000...................... $24,236 $32,314 $40,393 $48,471 $56,550 $ 63,058
$115,000.................... $29,486 $39,314 $49,143 $58,971 $68,800 $ 76,698
$135,000.................... $34,736 $46,314 $57,893 $69,471 $81,050 $ 90,338
$150,000.................... $38,673 $51,564 $64,455 $77,346 $90,237 $100,568
$175,000.................... $41,298 $55,064 $68,830 $82,596 $96,362 $107,388
$200,000.................... $41,298 $55,064 $68,830 $82,596 $96,362 $107,388
$225,000.................... $41,298 $55,064 $68,830 $82,596 $96,362 $107,388
$250,000.................... $41,298 $55,064 $68,830 $82,596 $96,362 $107,388
$275,000.................... $41,298 $55,064 $68,830 $82,596 $96,362 $107,388
Directors' Compensation:
- -----------------------
Each director of the Corporation is paid a quarterly fee of $750.00. In
addition, each outside director receives a fee of $250.00 for attendance at the
regular quarterly meetings of the Board of Directors of the Corporation. Each
director who is not an executive officer also receives $250.00 for attendance at
each committee meeting.
Item 12. Security Ownership of Certain Beneficial Owners and Management:
- -------- ---------------------------------------------------------------
Refer to Item 10 on pages 22 through 27.
Item 13. Certain Relationships and Related Transactions:
- -------- -----------------------------------------------
(a) Transaction with Management and Others
--------------------------------------
Incorporated by reference is the information appearing in Note 12 (Related
Parties) of Notes to Consolidated Financial Statements on page 17 of the Annual
Report.
29
(b) Certain Business Relationships
--------------------------------
Allen Shaffer, a director of the Corporation, is an attorney practicing in
Harrisburg and Millersburg, Pennsylvania, who has been retained in the last
fiscal year by the Corporation and who the Corporation proposes to retain in the
current fiscal year. James A. Ulsh, a director of the Corporation, is a
shareholder/employee of the law firm of Mette, Evans, & Woodside, Harrisburg,
Pennsylvania, which the Corporation has retained in the last fiscal year and
proposes to retain in the current fiscal year. Thomas J. Carlyon, a director of
CBNA , is a partner in the law firm of Carlyon & McNelis, Hazleton,
Pennsylvania, which the Corporation has retained in the last fiscal year and
proposes to retain in the current fiscal year. Earl L. Mummert, a director of
the Corporation, is an actuarial consultant with Conrad M. Siegel, Inc.,
Harrisburg, Pennsylvania, which provides actuarial services to the Corporation.
All loans to directors and their business affiliates, executive officers
and their immediate families were made by the subsidiary bank in the ordinary
course of business, at the subsidiary bank's normal credit terms, including
interest rates and collateralization prevailing at the time for comparable
transactions with other non- related persons, and do not represent more than a
normal risk of collection.
PART IV
Item 14. Exhibits, Financial Statements Schedules and Reports on Form 8-K:
- -------- -----------------------------------------------------------------
Reference (page)
(a) (1) Consolidated Financial Statements Form Annual Report to
Report of Independent Public 10-K Shareholders
---- ------------
Accountants --- 20
Balance Sheets as of December 31, 2000
and 1999 --- 6
Statements of Income for each of the three years
ended December 31, 2000 --- 7
Statements of Changes in Stockholders' Equity
for each of the three years ended
December 31, 1999. --- 8
Statements of Cash Flows for each of the three
years ended December 31, 2000. --- 9
Notes to Financial Statements --- 10-20
All other schedules are omitted since the required information is not
applicable or is not present in amounts sufficient to require
submission on the schedule.
(3) Exhibits
(3) Articles of Incorporation and By-Laws. Incorporated by
reference to the Proxy Statements dated April 14, 1987 and April
12, 1988 and Amendment 2 to Form S-2 dated May 13, 1987.
30
(13) Portions of the Annual Report to Security Holders
incorporated by reference within this document is filed as part
of this report.
(21) Subsidiaries of the Registrant (See Item 1, pages 2 and 3.)
(b) The registrant did not file on Form 8-K during the fourth
calendar quarter of the year ending December 31, 2000
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8(File No. 333- 37236 and File No. 333-37232) of Community
Banks, Inc. of our report dated January 18, 2001 relating to the consolidated
financial statements, which appears in the Annual Report to Shareholders, which
is incorporated in this Annual Report on Form 10-K.
PricewaterhouseCoopers LLP
One South Market Square
Harrisburg, Pennsylvania
March 26, 2001
31
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Community Banks, Inc.
By: (Ernest L. Lowe)
------------------
(Ernest L. Lowe)
Chairman of the Board and Director
Date: March 6, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
(Terry L. Burrows) Ex. Vice President and 2/13/01
- ------------------
(Terry L. Burrows) Chief Financial Officer
(Ronald E. Boyer) Director 2/13/01
- ------------------
(Ronald E. Boyer)
(Samuel E. Cooper) Director 2/13/01
- ------------------
(Samuel E. Cooper)
(Kenneth L. Deibler) Director 2/13/01
- --------------------
(Kenneth L. Deibler)
(Peter DeSoto) Director 2/13/01
- --------------------
(Peter DeSoto)
(Eddie L. Dunklebarger) President & CEO and 2/13/01
- -----------------------
(Eddie L. Dunklebarger) Director
(Ray N. Leidich) Director 2/13/01
- -----------------
(Ray N. Leidich)
(Thomas W. Long) Director 2/13/01
- -------------------
(Thomas W. Long)
(Donald L. Miller) Director 2/13/01
- --------------------
(Donald L. Miller)
32
(Thomas L. Miller) Director 2/13/01
- -------------------
(Thomas L. Miller)
(Earl L. Mummert) Director 2/13/01
- -------------------
(Earl L. Mummert)
(Wayne H. Mummert) Director 2/13/01
- -------------------
(Wayne H. Mummert)
(Susan K. Nenstiel) Director 2/13/01
- -------------------
(Susan K. Nenstiel)
(Robert W. Rissinger) Director 2/13/01
- ---------------------
(Robert W. Rissinger)
(Allen Shaffer) Director 2/13/01
- --------------------
(Allen Shaffer)
(John W. Taylor, Jr.) Director 2/13/01
- ---------------------
(John W. Taylor, Jr.)
(James A. Ulsh) Director 2/13/01
- ---------------------
(James A. Ulsh)
33
Report of Independent Accountants
Board of Directors and Shareholders
Community Banks, Inc.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, changes in stockholders' equity, and
cash flows present fairly, in all material respects, the financial position of
Community Banks, Inc. (Corporation) and its subsidiaries at December 31, 2000
and 1999, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Corporation's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
PRICEWATERHOUSECOOPERS, L.L.P.
Harrisburg, Pennsylvania
January 18, 2001
Community Banks, Inc. and Subsidiaries
CONSOLIDATED BALANCE SHEETS
At December 31, 2000 and 1999
(dollars in thousands except per share data)
2000 1999
-----------------------------------
ASSETS
Cash and due from banks.............................. $ 38,147 $ 29,094
Interest-bearing time deposits in other banks........ 2,275 1,789
Investment securities, available for sale (market value) 342,855 312,075
Federal funds sold................................... --- 2,050
Loans................................................ 696,499 596,301
Less: Unearned income............................. (3,984) (6,986)
Allowance for loan losses................... (8,471) (7,456)
------------ ------------
Net loans................................... 684,044 581,859
Premises and equipment, net.......................... 18,217 15,385
Goodwill............................................. 183 424
Other real estate owned.............................. 393 405
Loans held for sale.................................. 2,719 4,004
Accrued interest receivable and other assets......... 32,539 24,739
------------ ------------
Total assets.................................... $1,121,372 $971,824
======== =======
LIABILITIES
Deposits:
Demand (Non-interest bearing)................... $ 144,795 $ 55,330
Savings......................................... 200,033 266,464
Time............................................ 362,796 329,221
Time in denominations of $100 or more........... 71,622 42,421
------------- -----------
Total deposits.................................. 779,246 693,436
Short-term borrowings................................ 21,593 3,338
Long-term debt....................................... 224,934 197,000
Accrued interest payable and other liabilities....... 8,456 6,969
-------------- ------------
Total liabilities............................... 1,034,229 900,743
----------- ----------
STOCKHOLDERS' EQUITY
Preferred stock, no par value;
500,000 shares authorized;
no shares issued and outstanding................ --- ---
Common stock, $5.00 par value; 20,000,000 shares
authorized; 7,340,000 and 6,976,000 shares
issued, respectively............................ 36,701 34,878
Surplus.............................................. 29,155 24,259
Retained earnings.................................... 28,145 26,379
Accumulated other comprehensive loss, net
of tax benefit of $499 and $5,841,
respectively.................................... (926) (10,847)
Less: Treasury stock of 300,000 and 175,000
shares at cost, respectively.................... (5,932) (3,588)
-------------- -----------
Total stockholders' equity...................... 87,143 71,081
------------- ----------
Total liabilities and stockholders' equity...... $1,121,372 $971,824
======== =======
The accompanying notes are an integral part of the consolidated financial
statements.
Community Banks, Inc. and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME For the Years Ended December 31, 2000, 1999,
and 1998 (dollars in thousands except per share data)
2000 1999 1998
----------------------------------------
Interest income:
Interest and fees on loans...................... $56,807 $46,405 $41,306
Interest and dividends on investment securities:
Taxable..................................... 17,968 14,844 11,325
Tax-exempt.................................. 4,417 4,709 3,795
Other interest income........................... 57 78 80
Fed funds interest.............................. 329 228 494
----------- ---------- ----------
Total interest income....................... 79,578 66,264 57,000
-------- ------- --------
Interest expense:
Interest on deposits:
Savings..................................... 5,310 5,575 5,479
Time........................................ 20,270 15,501 13,459
Time in denominations of $100 or more....... 3,572 1,914 1,580
Interest on short-term borrowings and
long-term debt.............................. 11,280 7,670 4,975
Fed funds purchased and repo interest........... 1,288 1,553 1,394
--------- --------- ---------
Total interest expense...................... 41,720 32,213 26,887
-------- ------- --------
Net interest income......................... 37,858 34,051 30,113
Provision for loan losses............................ 2,308 1,298 1,464
--------- --------- ---------
Net interest income after provision for
loan losses............................... 35,550 32,753 28,649
-------- ------- --------
Other income:
Income from fiduciary related activities........ 527 458 302
Service charges on deposit accounts............. 2,518 2,077 1,584
Other service charges, commissions and fees..... 1,502 984 731
Investment security gains....................... 469 251 575
Insurance premiums income....................... 1,201 710 661
Gains on loan sales............................. 400 607 634
Other income.................................... 746 581 473
---------- ---------- ----------
Total other income.......................... 7,363 5,668 4,960
--------- --------- ---------
Other expenses:
Salaries and employee benefits.................. 13,899 12,436 10,380
Net occupancy expense........................... 3,864 3,377 3,202
Operating expenses of insurance subsidiary...... 586 497 472
Other operating expense......................... 7,425 6,627 5,971
--------- --------- ---------
Total other expenses........................ 25,774 22,937 20,025
-------- -------- --------
Income before income taxes.................. 17,139 15,484 13,584
Provision for income taxes........................... 4,288 3,681 3,534
--------- --------- ---------
Net income.................................. $12,851 $11,803 $10,050
====== ====== ======
Basic earnings per share.......................... 1] $ 1.82 $ 1.65 $ 1.40
====== ====== ======
Diluted earnings per share.........................1] $ 1.79 $ 1.62 $ 1.36
====== ====== ======
1] Per share data for all periods has been restated to reflect stock dividends
and splits. The accompanying notes are an integral part of the consolidated
financial statements.
Community Banks, Inc. and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
For the Years Ended December 31, 2000, 1999, and 1998 (dollars in thousands
except per share data)
Accumulated
Other Total
Common Retained Comprehensive Treasury Stockholders'
Stock Surplus Earnings Income Stock Equity
-------------------------------------------------------------------------------------
Balance, December 31, 1997................... $22,028 $28,645 $21,219 $ 3,237 $(1,116) $74,013
Comprehensive income:
Net income.......................... 10,050 10,050
Change in unrealized gain (loss) on
securities, net of tax of $(231) and
reclassification adjustment of $575. (448) (448)
------
Total comprehensive income.......... 9,602
Cash dividends ($.56 per share).............. (4,103) (4,103)
3 for 2 stock split (2,205,000 shares)...... 11,024 (11,024)
Net increase in treasury stock (40,000 shares) (966) (966)
Issuance of additional shares (21,000 shares). 105 368 (143) 330
------ ------ ------ ------ ------ ------
Balance, December 31, 1998................... 33,157 17,989 27,023 2,789 (2,082) 78,876
Comprehensive income:
Net income.......................... 11,803 11,803
Change in unrealized gain (loss) on
securities, net of tax of $(7,278) and
reclassification adjustment of $251 . (13,636) (13,636)
------
Total comprehensive loss............ (1,833)
Cash dividends ($.60 per share).............. (4,343) (4,343)
5% stock dividend (323,000 shares)........... 1,616 6,080 (7,696)
Net increase in treasury stock (82,000 shares). (1,885) (1,885)
Issuance of additional shares (21,000 shares) 105 190 (408) 379 266
------ ------ ------ ------ ------ ------
Balance, December 31, 1999.................. 34,878 24,259 26,379 (10,847) (3,588) 71,081
Comprehensive income:
Net income.......................... 12,851 12,851
Change in unrealized gain (loss) on
securities, net of tax of $5,342 and
reclassification adjustment of $469 . 9,921 9,921
------
Total comprehensive income.......... 22,772
Cash dividends ($.64 per share).............. (4,600) (4,600)
5% stock dividend (348,000 shares).......... 1,740 4,612 (6,352)
Net increase in treasury stock (125,000 shares). (2,344) (2,344)
Issuance of additional shares (16,000 shares) 83 284 (133) 234
------ ------ ------ ------ ------ ------
Balance, December 31, 2000. . . . . . . . . $36,701 $29,155 $28,145 $ (926) $(5,932) $87,143
====== ====== ====== ====== ====== ======
Per share data for all periods has been restated to reflect stock dividends and
splits. The accompanying notes are an integral part of the consolidated
financial statements.
Community Banks, Inc and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2000,
1999, and 1998 (in thousands)
2000 1999 1998
----------------------------------------------
Operating Activities:
Net income............................................... $ 12,851 $11,803 $10,050
Adjustments to reconcile net income to net
cash provided by operating activities:...............
Provision for loan losses............................ 2,308 1,298 1,464
Depreciation and amortization........................ 3,284 1,706 1,656
Amortization of goodwill............................. 241 241 241
Investment security gains............................ (469) (251) (575)
Loans originated for sale............................ (23,440) (33,285) (38,348)
Proceeds from sales of loans......................... 25,125 33,207 38,304
Gains on loan sales.................................. (400) (607) (634)
Change in other assets, net.......................... (12,575) (1,587) (3,769)
Increase in accrued interest payable and other
liabilities, net................................... 1,487 423 340
----------- ------------ -----------
Net cash provided by operating activities....... 8,412 12,948 8,729
----------- --------- ----------
Investing Activities:
Net (increase)decrease in interest-bearing time
deposits in other banks................................ (486) (531) 1,148
Proceeds from sales of investment securities............. 28,343 38,136 25,310
Proceeds from maturities of investment securities........ 9,540 26,984 80,425
Purchases of investment securities....................... (54,486) (105,316) (179,097)
Net increase in total loans.............................. (105,048) (88,430) (59,991)
Net increase in premises and equipment................... (4,561) (2,888) (1,896)
----------- ---------- ----------
Net cash used in investing activities........... (126,698) (132,045) (134,101)
--------- -------- --------
Financing Activities:
Net increase in total deposits........................... 85,810 97,531 46,150
Net increase (decrease) in short-term borrowings......... 18,255 (4,572) (2,630)
Proceeds from issuance of long-term debt................. 146,934 40,000 88,720
Repayment of long-term debt.............................. (119,000) (4,000) (5,000)
Cash dividends........................................... (4,600) (4,343) (4,103)
Purchases of treasury stock.............................. (2,344) (1,885) (966)
Proceeds from issuance of common stock................... 234 266 330
------------ ----------- -----------
Net cash provided by financing activities....... 125,289 122,997 122,501
--------- -------- --------
Increase (decrease) in cash and cash equivalents 7,003 3,900 (2,871)
Cash and cash equivalents at beginning of year................ 31,144 27,244 30,115
---------- --------- ----------
Cash and cash equivalents at end of year...................... $ 38,147 $ 31,144 $ 27,244
======= ====== ======
The accompanying notes are an integral part of the consolidated financial
statements.
Community Banks, Inc. and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Basis of Presentation:
---------------------------------------
Community Banks, Inc. (Corporation) is a financial holding company whose
wholly-owned subsidiaries include Community Banks, N.A. (CBNA), Peoples State
Bank (PSB), Community Banks Investments, Inc. (CBII) and Community Banks Life
Insurance Company (CBLIC). All significant intercompany transactions have been
eliminated. The Corporation operates through its main office in Millersburg,
Pennsylvania, and through 35 branch banking offices located in Adams,
Cumberland, Dauphin, Luzerne, Northumberland, Schuylkill, Snyder, and York
Counties in Pennsylvania. Community Banks, Inc.'s primary source of revenue is
derived from loans to customers, who are predominantly middle-income
individuals.
2. Summary of Significant Accounting Policies:
-------------------------------------------
The more significant accounting policies of the Corporation are:
Investment Securities:
The Corporation classifies debt and equity securities as either
"held-to-maturity," "available-for-sale," or "trading." Investments for which
management has the intent, and the Corporation has the ability, to hold to
maturity are carried at the lower of cost or market adjusted for amortization of
premium and accretion of discount. Amortization and accretion are calculated
principally on the interest method. Securities bought and held primarily for the
purpose of selling them in the near term are classified as "trading" and
reported at fair value. Changes in unrealized gains and losses on "trading"
securities are recognized in the Consolidated Statements of Income. At December
31, 2000 and 1999, there were no securities identified as "held-to- maturity" or
"trading." All other securities are classified as "available-for-sale"
securities and reported at fair value. Changes in unrealized gains and losses
for "available-for-sale" securities, net of applicable taxes, are recorded as a
component of stockholders' equity. Quoted market values, when available, are
used to determine the fair value of "available-for-sale". If quoted market
prices are not available, then fair values are estimated using quoted prices of
instruments with similiar characteristics.
Securities classified as "available-for-sale" include investments
management intends to use as part of its asset/liability management strategy,
and that may be sold in response to changes in interest rates, resultant
prepayment risk and other factors. Realized gains and losses on the sale of
securities are recognized using the specific identification method and are
included in Other Income in the Consolidated Statements of Income.
Allowance for Loan Losses:
The allowance for loan losses is established as losses are estimated to
have occurred through a provision for loan losses charged to earnings. Loan
losses are charged against the allowance when management believes the
uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any,
are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management
and is based upon management's periodic review of the collectibility of the
loans in light of historical experience, the nature and volume of the loan
portfolio, adverse situations that may affect the borrower's ability to repay,
estimated value of any underlying collateral and prevailing economic conditions.
This evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes available.
A loan is considered impaired when, based on current information and
events, it is probable that the Corporation will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Factors considered by management in
determining impairment
include payment status, collateral value, and the probability of collecting
scheduled principal and interest payments when due. Loans that experience
insignificant payment delays and payment shortfalls generally are not classified
as impaired. Management determines the significance of payment delays and
payment shortfalls on a case-by-case basis, taking into consideration all of the
circumstances surrounding the loan and the borrower, including the length of the
delay, the reasons for the delay, the borrower's prior payment record, and the
amount of the shortfall in relation to the principal and interest owed.
Impairment is measured on a loan by loan basis for commercial and construction
loans over $250,000 by either the present value of expected future cash flows
discounted at the loan's effective interest rate, the loans's obtainable market
price, or the fair value of the collateral if the loan is collateral dependent.
Large groups of smaller balance homogeneous loans are collectively
evaluated for impairment. Accordingly, the Corporation does not separately
identify individual consumer and residential loans for impairment disclosures.
Loans continue to be classified as impaired unless they are brought fully
current and the collection of scheduled interest and principal is considered
probable. When an impaired loan or portion of an impaired loan is determined to
be uncollectible, the portion deemed uncollectible is charged against the
related valuation allowance, and subsequent recoveries, if any, are credited to
the valuation allowance.
Premises and Equipment:
Premises and equipment are stated at cost, less accumulated depreciation
and amortization. Depreciation is calculated using accelerated and straight-line
methods over the estimated useful lives of the related assets as follows:
banking premises, 20 to 40 years, furniture, fixtures, and equipment, 3 to 5
years. Leasehold improvements are amortized over the shorter of the lease term
or 20 years. Long-lived assets are reviewed for impairment whenever events or
changes in business circumstances indicate the carrying value of the assets may
not be recovered. Maintenance and repairs are expensed as incurred, while major
additions and improvements are capitalized. Gain or loss on retirement or
disposal of individual assets is recorded as income or expense in the period of
retirement or disposal.
Goodwill:
Goodwill, which represents the excess of purchase price including
acquisition costs over the fair market value of net assets acquired under the
purchase method of accounting, is amortized on a straight-line basis over 15
years. Periodically, the Corporation re-evaluates goodwill and other intangibles
based on undiscounted operating cash flows whenever significant events or
changes occur which might impair recovery of recorded asset costs.
Pension Plan:
The Corporation has a noncontributory defined benefit pension plan covering
substantially all CBNA employees. Pension costs are funded currently subject to
the full funding limitation imposed under federal income tax regulations. The
defined benefit pension plan was amended during 2000 to disallow the admittance
of any future participants into the plan; however, previous plan participants
are still accruing benefits under the plan. The Corporation maintains a 401(k)
savings plan covering substantially all employees which allows employees to
invest a percentage of their earnings, matched to a certain amount specified by
the Corporation. Contributions to the savings plan which are included in
salaries and benefits expense amounted to $814,000 in 2000, $645,000 in 1999,
and $212,000 in 1998.
Income Taxes:
Deferred income taxes are accounted for by the liability method, wherein
deferred tax assets and liabilities are calculated on the differences between
the basis of assets and liabilities for financial statement purposes versus tax
purposes (temporary differences) using enacted tax rates in effect for the year
in which the differences are expected to reverse. Tax expense in the statements
of income is equal to the sum of taxes currently payable, including the effect
of the alternative minimum tax, if any, plus an amount necessary to adjust
deferred tax assets and liabilities to an amount equal to period-end temporary
differences at prevailing tax rates. (See Note 10).
Interest Income on Loans:
Interest income on commercial, consumer, and mortgage loans is recorded on
the interest method. Nonaccrual loans are those on which the accrual of interest
has ceased and where all previously accrued and unpaid interest is reversed.
Loans, other than consumer loans, are placed on nonaccrual status when principal
or interest is past due 90 days or more and the collateral may be inadequate to
recover principal and interest, or immediately, if in the opinion of management,
full collection is doubtful. Generally, the uncollateralized portions of
consumer loans past due 90 days or more are charged-off. Interest accrued but
not collected as of the date of placement on nonaccrual status is reversed and
charged against current income. Subsequent cash payments received either are
applied to the outstanding principal balance or recorded as interest income,
depending upon management's assessment of the ultimate collectibility of
principal and interest. (See also Note 5). Loan origination fees and certain
direct origination costs are being deferred and the net amount amortized as an
adjustment of the yield on the related loan under the interest method, generally
over the contractual life.
Other Real Estate Owned:
Real estate acquired through foreclosure is carried at the lower of the
recorded amount of the loan for which the foreclosed property previously served
as collateral or the current appraised value of the property at transfer date
less estimated selling cost. Prior to foreclosure, the recorded amount of the
loan is written down, if necessary, to the appraised value of the real estate to
be acquired by charging the allowance for loan losses. During 2000, 1999, and
1998 transfers from loans to real estate acquired through foreclosure totaled
$555,000, $581,000, and $980,000, respectively.
Subsequent to foreclosure, gains or losses on the sale of and losses on the
periodic revaluation of real estate acquired through foreclosure are credited or
charged to noninterest expense. Costs of maintaining and operating foreclosed
property are expensed as incurred. Expenditures to improve foreclosed properties
are capitalized only if expected to be recovered; otherwise, they are expensed.
Statement of Cash Flows:
Cash and cash equivalents included cash and due from banks and federal
funds sold. The Corporation made cash payments of $4,585,000, $3,805,000, and
$4,436,000, and $41,031,000, $31,786,000, and $26,011,000 for income taxes and
interest, respectively, in 2000, 1999, and 1998.
Segment Reporting:
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("SFAS 131") became effective
in 1998. This statement requires that public business enterprises report
financial and descriptive information about its reportable operating segments.
Based on the guidance by the statement, the Corporation has determined their
only reportable segment is Community Banking. The Corporation's non-banking
activities have been determined to be insignificant and do not require a
separate disclosure.
Comprehensive Income:
The Corporation reports comprehensive income in accordance with Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive Income."
Components of comprehensive income, as detailed in the Consolidated Statements
of Changes in Stockholders' Equity, are net of tax. Comprehensive income
includes a reclassification adjustment for net realized investment gains
included in net income of $469,000, $251,000, and $575,000 for the years ended
December 31, 2000, 1999, and 1998, respectively.
Recent Accounting Pronouncements:
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards ("SFAS") No. 140 "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities, a replacement
of FASB Statement No. 125" in September of 2000. This Statement replaces FASB
Statement No. 125, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities." It revises the standards for accounting for
securitizations and other transfers of financial assets and collateral and
requires certain disclosures, but it carries over most of Statement 125's
provisions without reconsideration. This Statement is not effective for
transfers until after March 31, 2001, however the disclosure requirements
relating to securitization transactions and collateral are effective for fiscal
years ending after December 31, 2000. Management has reviewed the Statement and
has determined that the Statement will have no impact on the Corporation's
financial condition or results of operations and that no additional disclosure
is required.
In March of 2000, the FASB issued FASB Interpretation Number ("FIN") 44,
"Accounting for Certain Transactions Involving Stock Compensation -- an
Interpretation of APB 25". The FIN clarifies the application of Accounting
Practice Bulletin ("APB") 25 for only certain issues, and does not address any
issues related to the application of the fair value method in SFAS 123. The
Interpretation clarifies (a) the definition of employee for purposes of applying
APB 25, (b) the criteria for determining whether a plan qualifies as a
non-compensatory plan, (c) the accounting consequence of various modifications
to the terms of a previously fixed stock option or award, and (d) the accounting
for an exchange of stock compensation awards in a business combination. This FIN
was effective for the third quarter of 2000 and had no material effect on the
Corporation's financial condition or results of operations.
In December 1999, the SEC issued Staff Accounting Bulletin ("SAB") 101,
"Revenue Recognition in Financial Statements", which, as amended, is effective
for calendar year-end registrants for their December 31, 2000 financial
statements. This SAB summarizes certain of the staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. The Corporation has implemented SAB 101 for their December 31, 2000
financial statements, with no material impact on the Corporation's revenue
recognition policies and procedures.
Use of Estimates in the Preparation of Financial Statements:
The preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
3. Investment Securities:
---------------------
The amortized cost and fair value of investment securities at December 31,
2000 and 1999 are as follows:
2000 1999
----------------------------------------------------------------------------------------
Gross Gross Gross Gross
Amortized Unrealized Unrealized Fair Amortized Unrealized Unrealized Fair
Cost Gains Losses Value Cost Gains Losses Value
----------------------------------------------------------------------------------------
(in thousands)
U.S. government corporations and agencies $129,200 $ 170 $ (3,260) $126,110 $132,661 $ 336 $(9,078) $123,919
Mortgage-backed U.S. government agencies. 59,827 311 (441) 59,697 61,788 40 (2,867) 58,961
Obligations of states and political subdivisions 95,376 2,266 (1,027) 96,615 84,778 214 (6,139) 78,853
Corporate securities..................... 38,447 1,126 (930) 38,643 31,739 333 (196) 31,876
Equity securities........................ 21,430 744 (384) 21,790 17,797 1,015 (346) 18,466
-------- ------- --------- -------- -------- ------- -------- --------
Total............................. $344,280 $4,617 $ (6,042) $342,855 $328,763 $1,938 $(18,626) $312,075
======= ===== ====== ======= ======= ===== ====== =======
The amortized cost and fair value of all investment securities at December
31, 2000 by contractual maturity, are shown below. Expected maturities will
differ from contractual maturities because borrowers may have the right to call
or repay obligations with or without call or prepayment penalties.
Amortized Fair
Cost Value
------------------------------------------
(in thousands)
Due in one year or less........................ $ 16,206 $ 15,950
Due after one year through five years.......... 23,642 23,799
Due after five years through ten years......... 70,251 69,819
Due after ten years............................ 152,924 151,800
---------- -------------
263,023 261,368
Mortgage-backed securities..................... 59,827 59,697
Equity securities.............................. 21,430 21,790
----------- -------------
$ 344,280 $342,855
======= =======
Proceeds from sales of investments in debt securities were $27,565,000,
$37,628,000 and $24,279,000 in 2000, 1999, and 1998, respectively. Gross
investment security gains and losses of $722,000 and $253,000, respectively were
recognized in 2000. Gross gains and losses of $607,000 and $356,000,
respectively, were recognized in 1999. Gross gains and losses of $592,000 and
$17,000, respectively were recognized in 1998.
At December 31, 2000 and 1999, investment securities with carrying amounts
of approximately $234,493,000 and $154,984,000, respectively, were pledged to
collateralize public deposits and for other purposes as provided by law.
Equity securities include Federal Home Loan Bank (FHLB) and Federal Reserve
Bank (FRB) stock which represents equity interests in the FHLB and the FRB,
however, it does not have a readily determinable fair value because ownership is
restricted and can be sold back only to the FHLBs, FRB, or to another member
institution.
4. Loans:
-----
The composition of loans outstanding by lending classification is as
follows:
December 31
--------------------------
2000 1999
--------------------------
(in thousands)
Commercial, financial and agricultural.............. $124,239 $100,970
Real-estate-construction............................ 20,230 14,670
Real-estate-mortgage................................ 434,315 362,297
Personal installment................................ 107,554 109,841
Other............................................... 10,161 8,523
---------- -----------
$696,499 $596,301
======= =======
Loans held for resale amounted to $2,719,000 and $4,004,000 at December 31,
2000 and 1999, respectively. These loans are primarily fixed-rate mortgages and
education loans.
5. Allowance for Loan Losses:
Changes in the allowance for loan losses are as follows:
December 31
---------------------------------------------------
2000 1999 1998
---------------------------------------------------
(in thousands)
Balance, January 1.................................... $7,456 $6,954 $6,270
Provision for loan losses............................. 2,308 1,298 1,464
Loan charge-offs...................................... (1,684) (1,232) (1,258)
Recoveries ........................................ 391 436 478
-------- -------- --------
Balance, December 31.................................. $8,471 $7,456 $6,954
===== ===== =====
NONPERFORMING LOANS (a)
AND OTHER REAL ESTATE
December 31
--------------------------------
2000 1999
--------------------------------
(in thousands)
Loans past due 90 days or more and still accruing interest:
Commercial, financial and agricultural........... $ 8 $ 146
Mortgages. . . . ................................ 495 147
Personal installment............................. 98 73
Other............................................ 11 12
--------- ---------
612 378
-------- --------
Restructured Loans 205 254
-------- --------
Loans on which accrual of interest has been discontinued:
Commercial, financial and agricultural........... 1,364 435
Mortgages........................................ 3,375 3,079
Other............................................ 356 222
-------- --------
5,095 3,736
------- -------
Other real estate..................................... 393 405
-------- --------
Total............................................ $6,305 $4,773
===== =====
(a) The determination to discontinue the accrual of interest on nonperforming
loans is made on the individual case basis. Such factors as the character and
size of the loan, quality of the collateral and the historical creditworthiness
of the borrower and/or guarantors are considered by management in assessing the
collectibility of such amounts.
Impaired Loans
- --------------
At December 31, 2000 and 1999, the recorded investments in loans for which
impairment has been recognized totaled $2,877,000 and $1,886,000, respectively,
none of which related to loans requiring a valuation allowance. For the years
ended December 31, 2000 and 1999, the average recorded investments in impaired
loans approximated $2,630,000 and $1,814,000, respectively. Interest recognized
on impaired loans on the cash basis for the years ending December 31, 2000 and
1999 was not significant.
6. Premises and Equipment:
-----------------------
Premises and equipment are comprised of the following:
December 31
-------------------------
2000 1999
-------------------------
(in thousands)
Banking premises................................................. $19,576 $16,885
Furniture, fixtures, and equipment............................... 14,514 12,510
Leasehold improvements........................................... 438 439
-------- -------
34,528 29,834
Less accumulated depreciation and amortization.................. (16,311) (14,449)
------- --------
$18,217 $15,385
====== ======
Depreciation and amortization expense charged to operations amounted to
approximately $1,881,000, $1,706,000, and $1,656,000 in 2000, 1999, and 1998,
respectively.
7. Short-Term Borrowings and Long-Term Debt:
-----------------------------------------
Short-term borrowings consist of the following:
December 31
-------------------------
2000 1999
-------------------------
(in thousands)
Securities sold under agreements to repurchase,
5.41% and 4.41% in 2000 and 1999, respectively................... $ 1,886 $1,328
Federal funds purchased, 6.64% in 2000........................... 18,200 ---
Treasury tax and loan note option account,
5.41% and 4.54% in 2000 and 1999, respectively................... 1,507 2,010
-------- -------
$21,593 $3,338
====== =====
Interest incurred on Federal funds purchased and other short-term
borrowings amounted to $560,000, $386,000, and $298,000 for the years ended
December 31, 2000, 1999, and 1998, respectively.
At December 31, 2000, long-term debt consists of long-term advances from
the FHLB of Pittsburgh totaling $213,000,000 and repurchase agreements totaling
$11,934,000. The long-term advances were issued under variable and fixed rates
and are due to mature from 2002 to 2010. Monthly payments of interest are
required to be paid to the Federal Home Loan Bank at rates ranging from 4.71% to
6.66% for variable advances, with principal due at maturity. Quarterly payments
of interest are required to be paid on the repurchase agreements at a fixed
rate, presently 5.57%, with principal due at maturity. Interest on long-term
debt amounted to $12,008,000, $8,837,000, and $6,071,000 for the years ended
December 31, 2000, 1999, and 1998, respectively.
Maturities on long-term debt at December 31, 2000 are as follows:
2001............................. $ 11,934,000
2002............................. $ 10,000,000
2003............................. $ 5,000,000
2004............................. $ ---
2005............................. $ ---
Subsequent to 2005............... $ 198,000,000
8. Pension Plan:
The following table sets forth the pension plan's funded status and pension
cost at and for the years ended December 31, 2000, 1999, and 1998.
2000 1999 1998
----------------------------------------------
(in thousands)
Changes in benefit obligation:
Projected benefit obligation at beginning of year................................. $5,079 $5,934 $4,461
Service cost...................................................................... 109 130 244
Interest cost..................................................................... 349 300 310
Distributions..................................................................... (170) (171) (128)
Change due to change in assumptions............................................... --- (369) 299
Change due to plan amendment...................................................... --- (1,235) 215
Experience loss................................................................... 53 490 533
--------- -------- --------
Projected benefit obligation at end of year....................................... $5,420 $5,079 $5,934
===== ===== =====
Change in plan assets:
Fair value of plan assets at beginning of year.................................... $5,198 $5,070 $4,546
Employer contributions............................................................ --- --- 355
Actual return on assets........................................................... 366 299 297
Distributions..................................................................... (170) (171) (128)
-------- -------- ------
Fair value of plan assets at end of year, primarily listed stocks,
corporate, and US bonds...................................................... $5,394 $5,198 $5,070
===== ===== =====
Funded status at end of year...................................................... $ (26) $ 119 $ (864)
Unrecognized net transition asset................................................. (13) (21) (29)
Unrecognized prior service cost................................................... (887) (997) 128
Unrecognized net loss............................................................. 1,836 1,820 1,679
------- ------- -------
End of year prepaid pension cost.................................................. $ 910 $ 921 $ 914
===== ===== =====
Discount rate..................................................................... 7.0% 7.0% 6.5%
Expected return on plan assets.................................................... 9.0% 9.0% 9.0%
Rate of compensation increase..................................................... 4.0% 4.0% 4.0%
Components of net periodic benefit cost:
Service cost...................................................................... $ 109 $ 130 $ 244
Interest cost..................................................................... 349 300 310
Actual return on plan assets...................................................... (366) (299) (297)
Amortization of unrecognized net transition (asset) or obligation................. (8) (8) (8)
Amortization of unrecognized prior service cost................................... (110) (110) (8)
Amortization of unrecognized net (gain) or loss................................... 130 119 48
Asset gain or (loss) deferred..................................................... (93) (139) (119)
--------- -------- --------
Net periodic pension cost (benefit) for the year.................................. $ 11 $ (7) $ 170
===== ===== =====
9. Earnings Per Share:
------------------
The following table sets forth the calculation of Basic and Fully Diluted
Earnings Per Share for the years ended below.
For the Year Ended 2000 For the Year Ended 1999 For the Year Ended 1998
----------------------- ----------------------- -----------------------
Per-Share Per-Share Per-Share
Income Shares Amount Income Shares Amount Income Shares Amount
------ ------ ------ ------ ------ ------ ------ ------ ------
(in thousands except for per share data)
Basic EPS:
Income available to common
stockholders..................... $12,851 7,076 $1.82 $11,803 7,175 $1.65 $10,050 7,202 $1.40
====== ==== ====== ==== ====== ====
Effect of Dilutive Securities:
Incentive stock options
outstanding...................... 105 130 166
------ ------- -------
Diluted EPS:
Income available to common
stockholders and assumed
conversion....................... $12,851 7,181 $1.79 $11,803 7,305 $1.62 $10,050 7,368 $1.36
====== ==== ====== ==== ====== ====
10. Income Taxes:
------------
The provision for income taxes consists of the following:
2000 1999 1998
------------------------------------------
(in thousands)
Current................................................... $4,873 $3,866 $4,004
Deferred.................................................. (585) (185) (470)
-------- -------- --------
$4,288 $3,681 $3,534
===== ===== =====
The components of the net deferred tax asset (liability) as of December 31,
2000, 1999, and 1998 were as follows:
2000 1999 1998
------------------------------------------
(in thousands)
Deferred tax assets:
Loan loss provision........................................... $2,608 $1,881 $1,531
Non-accrual loan interest income.............................. 255 357 363
Unrealized loss on marketable equity securities............... 499 5,841 ---
Miscellaneous................................................. 107 119 121
Deferred compensation......................................... 393 198 296
-------- -------- --------
Total deferred tax assets................................. $3,862 $8,396 $2,311
------ ------ ------
Deferred tax liabilities:
Depreciation.................................................. $ 536 $ 532 $ 560
Accretion of discount......................................... 336 226 176
Pension expense............................................... 319 322 285
Unrealized gain on marketable equity securities............... --- --- 1,437
Miscellaneous................................................. 112 --- ---
-------- ---------- ----------
Total deferred tax liability.............................. 1,303 1,080 2,458
------- ------- -------
Net deferred asset (liability)............................ $2,559 $7,316 $ (147)
===== ===== =====
2000 1999 1998
-----------------------------------------
(in thousands)
Computed "expected" tax provision.................................. $5,999 $5,419 $4,615
Effect of tax-exempt municipal bond and loan
interest, net of interest expense disallowance................ (1,484) (1,571) (1,230)
Goodwill amortization.............................................. 84 94 92
Nondeductible expense related to acquisition....................... --- --- 49
Other, net......................................................... (133) (163) 61
Officer life insurance, net........................................ (178) (98) (53)
-------- --------- ---------
Total provision for income taxes................................... $4,288 $3,681 $3,534
===== ===== =====
11. Stock-Based Compensation:
------------------------
The Corporation has a Long-term Incentive Plan (the "Plan") that allows the
Corporation to grant to employees, executive officers and directors stock awards
in the form of Incentive Stock Options, Nonqualified Stock Options or Stock
Appreciation Rights. The stock options are granted at prices not less than the
fair market value in the case of Incentive Stock Options and not less than 80%
of the fair market value in the case of Nonqualified Stock Options. The
Corporation has elected to follow Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees ("APB 25"), and related interpretations
in accounting for its stock-based compensation and to provide the disclosures
required under SFAS No. 123, Accounting for Stock Based Compensation ("SFAS
123"). Accordingly, no compensation expense has been recognized for stock
options issued under the Plan.
As of December 31, 2000, shares totaling 1,011,232 were authorized but not
awarded under the Plan. The stock options generally vest from one to five years
from the date of grant, and expire no later than ten years after the date of
grant. The changes in outstanding options are as follows:
Weighted
Average
Shares Under Exercise Price
Option Per Share
---------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1997 423,054 $13.99
Issued 119,926 24.02
Exercised (28,374) 10.82
Forfeited (1,914) 20.00
- ------------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1998 512,692 $17.07
Issued 88,000 22.50
Exercised (37,185) 9.96
Forfeited ---
- ------------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 1999 563,507 $17.71
Issued 114,500 19.23
Exercised (34,753) 10.60
Forfeited (2,627) 23.74
- ------------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 2000 640,627 $17.61
- ------------------------------------------------------------------------------------------------------------------------------------
Exercise prices for options outstanding as of December 31, 2000, ranged from
$6.10 to $24.87. The following table provides certain information with respect
to stock options outstanding at December 31, 2000:
Weighted Weighted
Average Average
Shares Exercise Remaining
Under Price Contractual
Range of exercise prices per share Option Per Share Life in Years
- ------------------------------------------------------------------------------------------------------------------------------------
Under $9.00 40,575 $ 8.02 3.17
$9.01-$12.00 89,751 $10.78 4.90
$12.01-$16.00 123,520 $14.02 4.60
$16.01-$20.00 114,500 $19.22 9.83
$20.01-$22.00 177,465 $21.48 8.45
$22.01-$24.87 94,816 $23.64 7.01
- ------------------------------------------------------------------------------------------------------------------------------------
640,627 $17.61 6.91
- ------------------------------------------------------------------------------------------------------------------------------------
The following table provides certain information with respect to stock
options exercisable at December 31, 2000:
Weighted Weighted
Average Average
Exercise Remaining
Shares Price Contractual
Range of exercise prices per share Exercisable Per Share Life in Years
- ------------------------------------------------------------------------------------------------------------------------------------
Under $9.00 40,575 $ 8.02 3.17
$9.01-$12.00 83,721 $10.75 4.82
$12.01-$16.00 118,469 $14.02 4.54
$20.01-$22.00 70,826 $21.49 8.36
$22.01-$24.87 84.650 $23.50 8.36
- ------------------------------------------------------------------------------------------------------------------------------------
398,241 $16.07 5.66
- ------------------------------------------------------------------------------------------------------------------------------------
In electing to follow APB 25 for expense recognition purposes, the Corporation
is obliged to provide the expanded disclosures required under SFAS 123 for
stock-based compensation granted. The weighted average fair values at date of
grant for options granted during fiscal 2000, 1999, and 1998 were $3.63, $5.45,
and $5.05, respectively, and were estimated using the Black-Scholes option
valuation model with the following weighted average assumptions for 2000, 1999,
and 1998, respectively: dividend yield of 3.3%, 2.9%, and 2.5%; volatility of
21%, 23%, and 23%; risk free interest rates of 5.6%, 6.1%, and 4.8%; and
expected life in years of 4.9, 5.5, and 6.0.
If the Corporation had adopted the provisions of SFAS 123, the impact on
reported net income and earnings per share would have been as follows:
2000 1999 1998
---- ---- ----
Net income ($259,000) ($195,000) ($267,000)
Earnings per share:
Basic ($.04) ($.03) ($.04)
Diluted ($.03) ($.02) ($.02)
12. Related Parties:
----------------
Certain directors and their business affiliates (defined as the beneficial
ownership of at least a 10 percent interest), executive officers and their
families are indebted to Community Banks, N.A. and Peoples State Bank. In the
opinion of management, such loans are consistent with sound banking practices
and are within applicable regulatory lending limitations.
2000 1999 1998
------------------------------------
(in thousands)
Balance beginning of period..................... $ 8,479 $6,548 $6,367
Additions....................................... 213 5,255 2,003
Amounts collected............................... (250) (3,324) (1,822)
-------- ------- -------
Balance end of period........................... $8,442 $8,479 $6,548
===== ===== =====
13. Condensed Financial Information of Community Banks, Inc. (Parent Only):
------------------------------------------------------------------------
2000 1999
---------------------------
( in thousands)
Condensed Balance Sheets:
Cash and investments............................................ $ 106 $ 50
Investment in Community Banks, N.A. ............................ 50,674 42,799
Investment in Peoples State Bank................................ 33,653 25,620
Investment in nonbank subsidiaries.............................. 2,223 2,064
Other assets.................................................... 487 754
---------- ----------
Total assets.................................................... $87,143 $71,287
====== ======
Other liabilities...............................................$ --- $ 206
Stockholders' equity............................................ 87,143 71,081
-------- --------
Total liabilities and stockholders' equity...................... $87,143 $71,287
====== ======
2000 1999 1998
----------------------------------
(in thousands)
Condensed Statements of Income:
Dividends from:
Community Banks, N.A. .......................................... $ 6,372 $ 5,415 $ 5,279
Peoples State Bank.............................................. 928 --- 285
Nonbank subsidiaries............................................ --- 1,854 ---
Other income (expense)................................................ (595) (491) (546)
--------- --------- ---------
Income before equity in undistributed earnings of subsidiaries............. 6,705 6,778 5,018
--------- --------- ---------
Equity in undistributed earnings of:
Community Banks, N.A.................................................. 1,282 1,901 1,483
Peoples State Bank.................................................... 4,472 4,685 3,118
Nonbank subsidiaries................................................. 392 (1.561) 431
--------- --------- ---------
6,146 5,025 5,032
--------- --------- ---------
Net income................................................................. $12,851 $11,803 $10,050
====== ====== ======
Condensed Statements of Cash Flows:
Operating activities:
Net income............................................................ $12,851 $11,803 $ 10,050
Adjustments to reconcile net cash provided by
operating activities:
Undistributed earnings of:
Community Banks, N.A......................................... (1,282) (1,901) (1,483)
Peoples State Bank........................................... (4,472) (4,685) (3,118)
Nonbank subsidiaries......................................... (392) 1,561 (431)
Other, net........................................................ 61 84 (266)
--------- --------- ---------
Net cash provided by operating activities.................... 6,766 6,862 4,752
Investing activities:
Additional investment in Peoples State Bank....................... --- (1,000) ---
--------- --------- ---------
Net cash used in investment activities....................... --- (1,000) ---
--------- --------- ---------
Financing Activities:
Proceeds from issuance of common stock................................ 564 266 330
Purchase of Treasury Stock............................................ (2,674) (1,885) (966)
Dividends paid........................................................ (4,600) (4,343) (4,103)
--------- --------- ---------
Net cash used by financing activities........................ (6,710) (5,962) (4,739)
--------- --------- ---------
Net change in cash and cash equivalents...................... 56 (100) 13
Cash and cash equivalents at beginning of year........................ 50 150 137
--------- --------- ---------
Cash and cash equivalents at end of year.............................. $ 106 $ 50 $ 150
====== ====== ======
14. Regulatory Restrictions of Banking Subsidiaries:
------------------------------------------------
CBNA and PSB are subject to legal limitations as to the amount of dividends
that can be paid to its shareholder (the Corporation). The approval of certain
banking regulatory authorities is required if the total of all dividends
declared by the bank exceeds limits as defined by the regulatory authorities.
CBNA and PSB could declare dividends in 2001 without regulatory approval of
$12,340,000 plus an additional amount equal to the banks' retained net profits
in 2001 up to the date of any dividend declaration.
Included in cash and due from banks are balances required to be maintained
by subsidiary banking companies on deposit with the Federal Reserve. The amounts
of such reserves are based on percentages of certain deposit types and totaled
$440,000 at December 31, 2000 and 1999.
15. Financial Instruments with Off-Balance Sheet Risk:
--------------------------------------------------
The Corporation is party to financial instruments with off-balance sheet
risk in the normal course of business to meet the financing needs of its
customers and to reduce its own exposure to fluctuations in interest rates.
These financial instruments include commitments to originate loans and standby
letters of credit. The instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
consolidated statement of condition. The contract or notional amounts of those
instruments reflect the extent of involvement the Corporation has in particular
classes of financial instruments.
Financial instruments with off-balance sheet risk at December 31, 2000, are
as follows:
Contract or Notional Amount
(in thousands)
Financial instruments whose contract amounts represent credit risk:
Commitments to originate loans.................................. $ 90,602
Unused lines of credit......................................... $ 32,561
Standby letters of credit.................................... . . $ 9,847
Unadvanced portions of construction loans....................... $ ---
Commitments to originate loans are agreements to lend to a customer
provided there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amount does not
necessarily represent future cash requirements. Lines of credit are similar to
commitments as they have fixed expiration dates and are driven by certain
criteria contained within the loan agreement. Lines of credit normally do not
extend beyond a period of one year. The Corporation evaluates each customer's
credit worthiness on a case-by-case basis. The amount of collateral obtained, if
deemed necessary by the Corporation upon extension of credit, is based on
management's credit evaluation of the borrower.
Standby letters of credit are conditional commitments issued by the
Corporation to guarantee the performance by a customer to a third party. The
credit risk involved in issuing letters of credit is essentially the same as
that involved in extending loan facilities to customers.
16. Quarterly Results of Operations (Unaudited):
-------------------------------------------
The following is a summary of the quarterly results of operations for the
years ended December 31, 2000 and 1999:
Three Months Ended
----------------------------------------------------------------------------------------
2000 1999
----------------------------------------------------------------------------------------
Mar. 31 June 30 Sept. 30 Dec. 31 Mar. 31 June 30 Sept. 30 Dec. 31
------- ------- -------- ------- ------- ------- -------- -------
(dollars in thousands except per share data)
Interest income $18,267 $19,345 $20,649 $21,317 $15,479 $16,188 $16,764 $17,833
Interest expense 9,244 9,922 11,114 11,440 7,523 7,839 8,116 8,735
------- ------- -------- ------- ------- ------- -------- -------
Net interest income 9,023 9,423 9,535 9,877 7,956 8,349 8,648 9,098
Provision for loan losses 316 500 613 879 276 291 220 511
------- ------- -------- ------- ------- ------- -------- -------
Net interest income after provision for
loan losses 8,707 8,923 8,922 8,998 7,680 8,058 8,428 8,587
Other income 1,486 1,662 1,801 1,545 1,029 1,229 1,336 1,216
Investment security gains (losses) 168 50 140 111 153 (29) 3 124
Gains on mortgage sales 65 93 90 152 276 138 94 99
Other expenses 6,318 6,465 6,602 6,389 5,592 5,542 5,885 5,918
------- ------- -------- ------- ------- ------- -------- -------
Income before income taxes 4,108 4,263 4,351 4,417 3,546 3,854 3,976 4,108
Income taxes 1,007 1,091 1,108 1,082 864 935 869 1,013
------- ------- -------- ------- ------- ------- -------- -------
Net income $ 3,101 $ 3,172 $ 3,243 $ 3,335 $ 2,682 $ 2,919 $ 3,107 $ 3,095
======= ======= ======== ======= ======= ======= ======= =======
Basic earnings per share $ .44 $ .45 $ .46 $ .47 $ .37 $ .41 $ .44 $ .43
Diluted earnings per share $ .43 $ .44 $ .45 $ .47 $ .36 $ .40 $ .43 $ .43
Dividends per share $ .15 $ .16 $ .16 $ .17 $ .14 $ .15 $ .15 $ .15
Per share data has been restated to reflect stock dividends and splits.
17. Fair Values of Financial Instruments:
-------------------------------------
The following methodologies and assumptions were used by the Corporation to
estimate its fair value disclosures:
Cash and due from banks, interest-bearing time deposits, and federal funds sold:
The carrying values for cash and due from banks, interest-bearing time
deposits, and federal funds sold is deemed to be the same as those assets' fair
values.
Investment securities:
Fair values for investment securities are based on quoted market prices,
where available. If quoted market prices are not available, fair values are
based on quoted market prices of comparable instruments.
Loans:
For variable-rate loans that reprice frequently with no significant change
in credit risk, fair value equals carrying value. The fair values for fixed-rate
residential mortgage loans, consumer loans, commercial, and commercial real
estate loans are estimated by discounting the future cash flows using comparable
current rates at which similar loans would be made to borrowers at similar
credit risk. The carrying value of accrued interest adjusted for credit risk
equals its fair value. The fair value of loans held for sale is based on quoted
market prices for similar loans sold in securitization transactions.
Deposit liabilities:
The fair values of demand and savings deposits equal their carrying values.
Adjusting such fair value for any value from retaining those deposit
relationships in the future is prohibited. That component, known as a core
deposit intangible, is not considered in the value disclosed nor is it recorded
in the balance sheet. The carrying values for variable rate money market
accounts approximate their fair values at the reporting date. Fair values for
fixed-rate certificates of deposit are estimated using rates currently offered
for similar deposits.
Short-term borrowings:
The fair values of short-term borrowings approximate their carrying values.
Long-term borrowings:
The fair values of the Corporation's long-term borrowings are estimated
using discounted cash flows analyses, based on rates available to the
Corporation for similar types of borrowings.
Off-balance-sheet instruments:
Fair values for the Corporation's unused commitments to originate loans and
unused lines of credit are deemed to be the same as their carrying values.
The following table summarizes the carrying values and fair values of
financial instruments at December 31, 2000 and 1999:
December 31,
-------------------------------------------------------
2000 1999
-------------------------------------------------------
Estimated Estimated
Carrying Fair Carrying Fair
Value Value Value Value
-------------------------------------------------------
(in thousands)
Financial assets:
Cash and due from banks, interest-bearing time
deposits, and federal funds sold $ 40,422 $ 40,422 $ 32,933 $ 32,933
Investment securities 342,855 342,855 312,075 312,075
Loans, net of unearned income 692,515 675,879 589,315 577,458
Less: Allowance for loan losses (8,471) --- (7,456) ---
-------- --------- --------- --------
Net loans 684,044 675,879 581,859 577,458
Loans held for sale 2,719 2,719 4,004 4,004
-------- --------- --------- --------
Total $1,070,040 $1,061,875 $930,871 $926,470
========= ========= ======== ========
Financial liabilities:
Deposits $ 779,246 $ 776,428 $693,436 $691,186
Short-term borrowings 21,593 21,593 3,338 3,338
Long-term debt 224,934 224,895 197,000 193,769
--------- --------- -------- --------
Total $1,025,773 $1,022,916 $893,774 $888,293
========= ========= ======= =======
18. Subsequent Event-Acquisition:
----------------------------
On November 7, 2000 Community Banks, Inc. (Community) signed a definitive
agreement to acquire The Glen Rock State Bank (Glen Rock), a Pennsylvania bank
located in York County, with $188 million in assets and $140 million in deposits
at December 31, 2000. Community will acquire Glen Rock for approximately
1,205,000 shares of its common stock based on an exchange ratio of .900 shares
of Community common stock for each share of Glen Rock common stock. The
acquisition requires shareholder and regulatory approval prior to consummation
and is not expected to close until late in the first quarter of 2001. The
acquisition will be accounted for under pooling-of- interests method of
accounting, accordingly upon consummation the financial statements of Community
will be restated to include the consolidated accounts of Glen Rock.
A summary of unaudited pro forma combined financial information for
Community and Glen Rock follows:
Year Ended December 31 2000 1999 1998
- ---------------------- ---------------------------------------------------------------------------------
(dollars in thousands except per share data)
Community Glen Rock Community Glen Rock Community Glen Rock
As Reported Combined As Reported Combined As Reported Combined
----------- ---------- ----------- -------- ----------- --------
Net interest income........................ $37,858 $43,817 $34,051 $40,105 $30,113 $36,039
Provision for loan losses and lease losses. 2,308 2,863 1,298 1,588 1,464 2,054
Other income............................... 7,363 8,092 5,668 6,574 4,960 5,574
Other expenses............................. 25,774 30,417 22,937 27,544 20,025 24,446
-------- -------- -------- -------- -------- --------
Income before taxes........................ 17,139 18,629 15,484 17,547 13,584 15,113
Taxes...................................... 4,288 4,699 3,681 4,257 3,534 3,882
--------- --------- --------- --------- --------- ---------
Net income................................. $12,851 $13,930 $11,803 $13,290 $10,050 $11,231
====== ====== ====== ====== ====== ======
Basic earnings per share................... $ 1.82 $ 1.69 $ 1.65 $ 1.59 $ 1.40 $ 1.34
Diluted earnings per share................. $ 1.79 $ 1.66 $ 1.62 $ 1.56 $ 1.36 $ 1.31
====== ====== ====== ====== ====== =====